Standing Committee A

[Mr. John McWilliam in the Chair]

Finance Bill

(except clauses 4, 5, 20, 28, 57 to 77, 86, 111 and 282 to 289, and schedules 1, 3, 11, 12, 21 and 37 to 39) - Clause 119 - Restriction of relief: non-active partners

Amendment proposed [this day]: No. 183, in 
clause 119, page 99, line 30, leave out 
 'or a member of a limited liability partnership'.—[Mr. Prisk]
 Question again proposed, That the amendment be made.

John McWilliam: I remind the Committee that with this we are taking amendment No. 182, in
clause 119, page 100, line 11, leave out subsections (7) and (8) and insert— 
 '(7) In subsection (1) ''a trade'' does not include— 
 (a) underwriting business within the meaning of section 184 of the Finance Act 1993 (Lloyd's underwriters), or 
 (b) a trade where the Board have, on the application of a partnership of which an individual is a general partner or member of a limited liability partnership, notified the partnership that the Board is satisfied that the trade will be effected for bona fide commercial reasons and will not form part of any scheme or arrangements of which the main purpose, or one of the main purposes, is avoidance of liability of tax. 
 (8) Any application under subsection (7)(b) above shall be in writing and shall contain particulars of the operations that are to be effected and the Board may, within 30 days of the receipt of the application or of any further particulars previously required under this subsection, by notice require the applicant to furnish further particulars for the purpose of enabling the Board to make their decision; and if any such notice is not complied with within 30 days or such longer period as the Board may allow, the Board need not proceed further on the application. 
 (9) The Board shall notify their decision to the applicant within 30 days of receiving the application or, if they give a notice under subsection (8) above, within 30 days of the notice being complied with. 
 (10) If the Board notify the applicant that they are not satisfied as mentioned in subsection (7)(b) above or do not notify their decision to the applicant within the time required by subsection (9) above, the applicant may within 30 days of the notification or of that time require the Board to transmit the application, together with any notice given and further particulars furnished under subsection (8) above, to the Special Commissioners; and in that event any notification by the Special Commissioners shall have effect for the purposes of subsection (7)(b) above as if it were a notification by the Board. 
 (11) If any particulars, furnished under this section do not fully and accurately disclose all facts and considerations material for the decision of the Board or the Special Commissioners, any resulting notification that the Board or Commissioners are satisfied as mentioned in subsection (7)(b) above shall be void. 
 (12) This section has effect subject to sections 118ZJ and 118ZK (transitional provision). 
 118ZEA Application to particular trades 
 (1) Section 118ZE(7)(b) shall not apply to any trade unless— 
 (a) It can be shown that in respect of any period where a loss was sustained, the trade was carried on throughout that period on a commercial basis and in such a way that profits in the trade 
could reasonably be expected to be realised in that period or within a reasonable time thereafter; 
 (b) The profits of the trade are taxed on the general partners or members of a limited liability partnership who claimed the reliefs referred to in subsection 118ZE(1) in the same proportions that the partnership's loss was claimed. 
 (c) The partnership's expenditure is not applied, directly or indirectly, to provide security for repayment of any borrowings of the partnership or of any of its general partners or members of a limited liability partnership, including without limitation, by means of a cash deposit; 
 (d) The receipts from the trade are entirely contingent on the performance of the products or services comprising the trade; and 
 (e) The trade is carried on for bona fide commercial reasons and does not form part of a scheme or arrangements of which the main purpose, or one of the main purposes, is avoidance of liability of tax. 
 (2) The Board may make regulations with respect to the application of section 118ZEA(1) above to particular trades.'.

Ruth Kelly: I am delighted to see you in the Chair again this afternoon, Mr. McWilliam, because I rise with a little trepidation, as the Treasury's resident tax expert, the Paymaster General, is undergoing an emergency dental procedure. Nevertheless, I am delighted to be able to address the subject of film tax relief, and in particular the amendments tabled by the hon. Member for Hertford and Stortford (Mr. Prisk). I believe that the amendments would seriously undermine the effect of the legislation and open the door to continued avoidance on a wide scale.
 Clause 119 tackles tax avoidance and deals with schemes that offer a risk-free tax gain to wealthy individuals acting in partnership through misuse of loss relief intended to benefit people who risk their capital trying to make a living from a trade. The abuse consists of the misuse of sideways trading loss relief so that wealthy individuals receive tax relief that is greater than their financial contribution to the partnership. It follows that the partnership must be trading if there is to be a trading loss on which the scheme depends. I would argue that to exclude partnerships from the provision simply on the basis that they were trading would miss the abuse entirely. I want to make it absolutely clear that the clause does not enforce a specific commercial structure on partnerships. It simply restricts the way in which losses can be used for tax purposes. 
 The schemes that the clause targets effectively allow a business to transfer the benefit of its trading losses to a partnership of individuals by allocating more losses to the individuals than the amount they put into the partnership. The individuals can then cash in the loss by setting it against their general income and gains. Because they claim 100 per cent. of the losses, the wealthy individuals get back 40 per cent. as a tax rebate. That is more than the 25 to 35 per cent. that they typically put in, so they receive an immediate cash gain at the expense of the Exchequer. 
 The partners using the scheme have not, in effect, invested any of their own money: their investment was funded by the honest taxpaying public. In practice, the individuals are guaranteed to make a tax-free gain, even if the trade generates no income whatever, as the tax relief is greater than the amount they have put in, 
 and they have a chance of increasing their gain if the trade generates future income. They are on a one-way bet, underwritten by the Exchequer.

Mark Prisk: Does the Financial Secretary accept that, as was inferred from the Paymaster General during our previous debate, the clause as drafted casts the net wider than simply the illegal activity to which she has rightly referred, and which it is right to block in the clause? Does she accept that the danger is that, contrary to what was said previously, the provision will affect legitimate commercial trades, even if only a small number?

Ruth Kelly: This turns on the point of certainty, which the hon. Gentleman talked about this morning. The new rules ensure that individuals cannot claim more loss relief against their general income than they have put into the partnership. To claim the rest of the loss, they must either stay in the trade and claim it against future profits or make a further contribution. The changes apply only to someone who is not active in running the trade and only to losses in the first four years that the trade carries on. They have no effect on someone who actively starts up and runs their own business.
 I do not accept the hon. Gentleman's point. The legislation as drafted carries an objective test and people will know where they stand.

Mark Prisk: What future, then, would business angels have in this environment?

Ruth Kelly: Well, business angels, just like any other investor through a partnership model, will know exactly where they stand. An objective test is applied, and they know under what circumstances they can claim options against future profits, and indeed they understand exactly how the contributions are treated, both in the initial year and in future years.

Mark Prisk: I am not entirely sure that that is clear, because many business angels do not take an ''active role'' as defined in this clause. Can the Financial Secretary clarify what that means, and what that will therefore mean to business angels, whether in film or, frankly, in any other partnership?

Ruth Kelly: This is a narrowly drawn definition, for the reasons that I have set out already. Turning to business angels, one has to ask the question: why should they attain more relief than they have invested through a partnership in the film industry? It is a fairly common-sense proposition that relief should be constrained in the way that the new rules set out.
 On amendment No. 182, an important part of the new rules is the change for limited liability partnerships. Under the current rules, as the hon. Gentleman pointed out this morning, a member of a limited liability partnership can base their claim to loss relief on the amount of their liability in a winding up. However, this liability can be no more than notional, and has been exploited aggressively to allow individuals to claim far more in loss relief than they have actually contributed. That is why we are changing the rules, so that only the actual amounts 
 contributed, either in the course of the trade or during a winding up, can rank as contributions for deciding the amount of loss relief against general income. However, we are making those changes only for people who are not actively engaged in the trade of a limited liability partnership, which draws a clear line between people who are actively running their own businesses and people who use these vehicles as schemes to claim large amounts of tax relief when they have no active role in the trade. 
 I can confirm that the existing provision under section 118ZC, which the hon. Gentleman raised this morning, has not been repealed, because this provision is still required to apply to partners who are not affected by the new rules—for example, active partners. If amendment No. 183 were accepted, it would mean that all members of limited liability partnerships could carry on as if nothing had changed, which would completely undermine the effect of this measure. 
 I also ask the Committee to reject the amendment No. 182, on two grounds. First, there is the question of certainty. I can confirm that it would create uncertainty over how and when the legislation will apply. The new rules that we have introduced are simple and objective, as I have already set out. If you are not an active trader, you can claim losses against general income only up to the amount of your contribution. It is easy to apply, and easy to understand. The amendment would introduce a whole layer of subjective tests that would make the position uncertain, as well as being a burdensome administrative procedure. 
 Secondly, the amendment is founded on a completely flawed view of profits and commerciality. These schemes involve creating a very large loss in year one by selling a film, say, with the right to future income, and estimating that future income at a fraction of the production cost.

Stephen Pound: Very briefly, those of us whose previous experience of these fiscal manoeuvres has been limited to watching ''The Producers'', the Mel Brooks film with Zero Mostel, which seems to have something in common with this situation, have been listening with great interest. I am becoming more inclined by the minute to support the Government on this. However, I have received a number of letters from constituents on the fashionable left bank area of Ealing, North—the left bank of the River Brent, of course—who are involved in film production and fear that the clause impacts on future plans and commitments that they have made over the next months. Will my hon. Friend give me an assurance that that will not be the case?

John McWilliam: It will not be in order for members of the Committee to burst out singing ''Springtime for Hitler''.

Ruth Kelly: I am delighted that my hon. Friend is inclined to support the Government's position. It is always reassuring to hear the value of an argument. I will continue to explain how contrived the actual schemes are, to illustrate the point that people who
 entered into these artificial arrangements knew that they were in danger of being stopped.
 The loss in year one is allocated to individuals in the partnership who use sideways tax relief so that they are guaranteed a return—gaining more from tax relief than their original capital contribution—even if the partnership earns no taxable income at all. That is not a genuinely commercial arrangement. It is an abuse of sideways tax relief, and the clause prevents that abuse fairly and objectively. In contrast, the authors of the amendment appear to believe that a scheme is commercial if it is set up with a prospect of the partnership receiving taxable profits from year two onwards, even if the profits are estimated to be a fraction of the loss in year one. That is not the Government's idea of a genuinely commercial arrangement. The amendment would mean that the prospect of even a few pounds of profit in later years would remove the restrictions on the initial loss claim. 
 We are determined to tackle tax avoidance. The Government have been extremely generous in supporting the film industry with tax relief. It was very disappointing to find that some people in the industry were intending to use an unintended tax subsidy that would have cost several hundred million pounds a year. I believe that any responsible Government would have acted quickly to stop such schemes with immediate effect. 
 Since the announcement on 10 February, most of the films have been refinanced and are in production. In April, 15 films were shooting in the UK: one more than in April 2003, and 2003 was a record year for film production. I therefore ask the Committee to reject the amendment, which would render the new rules ineffective and allow substantial tax losses through avoidance to continue unchecked.

Mark Prisk: I welcome the Financial Secretary, who is speaking at short notice for the Paymaster General. She is performing as what one might describe as a parliamentary stunt double.
 We are discussing two amendments, and I am aware that amendment No. 183 has been proposed formally, but not amendment No. 182. Listening to the Financial Secretary run through the Government's arguments, I am not convinced that sufficient consideration has been given to the impact of the clause. If it is not the Government's intention to hit genuine trades, I have to say that the clause would undermine that aim. 
 The Minister has said that the clause has simple and objective rules, which may indeed be the case. However, one of the problems with the clause—this is a common theme in the Bill—is that it seems to have a catch-all approach, underwritten by very rigid rules, under which some innocent and legitimate trades will be caught up in the process, but there is an assumption that that can be amended in due course. Such a legislative approach is questionable and likely to lead to a significant number of further changes to tax law and, therefore, further complexities. Some might argue that the very reason why we are debating the clauses today is that the original scheme was not right in 1997. 
 It is also unclear whether the Government have made a proper and thorough assessment of the impact of the clause. The hon. Member for Yeovil (Mr. Laws) talked in previous debates about whether an objective assessment has been made of how a measure will impact on the industry. Members of the Committee will understand, as do members of the Culture, Media and Sport Committee, that certainty in the tax regime is crucial to the film industry. I shall briefly cite one of the leading witnesses to that Committee, Mr. David Elstein, the chairman of the British Screen Advisory Council. He said: 
''What we actually need . . . if we were really going to try and solve this once and for all, is . . . a permanent fiscal regime which we know is there forever, that is how you treat a film from a tax point of view.''
 That is very much the view of the industry as a whole. The danger is that the clause will compound the errors that were made in the beginning. The purpose of amendment No. 182, in particular, and No. 183 was to prevent that. 
 On amendment No. 182, I hope that the Financial Secretary will confirm that the Treasury, as well as the Department for Culture, Media and Sport, will watch and monitor the impact with care. There is concern across the House that, having established a stable fiscal regime, via both section 42 and section 48, for how film investment is treated, the events of 10 February—perhaps rightly plugging some activity that is not legitimate—sent out a signal that could undermine the long-term viability of many films in this country. I hope that she will forward those concerns to her colleague the Paymaster General. 
 I beg to ask leave to withdraw the amendment. 
 Amendment, by leave, withdrawn. 
 Question proposed, That the clause stand part of the Bill.

Mark Prisk: May I ask for guidance, Mr. McWilliam? Amendment No. 182 was attached to No. 183. I am unclear whether I have formally withdrawn it.

John McWilliam: No. It has not been moved.

Mark Prisk: So we have just debated No. 182?

John McWilliam: We have debated both No. 182 and No. 183. We are now debating clause stand part.

Mark Prisk: Thank you, Mr. McWilliam. I wanted to make sure that we had not missed anything. I did not want to be cut off in my prime.

John McWilliam: Order. The hon. Gentleman is wise. I have seen Opposition, and Government, spokesmen get it completely wrong and accidentally lose an opportunity for themselves.

Mark Prisk: Thank you, Mr. McWilliam. We do not want to tempt the hon. Member for Ealing, North (Mr. Pound) further.
 Sitting suspended for a Division in the House. 
 On resuming—

Mark Prisk: Before the Kia-Ora oranges are put away after the intermission—I am showing my age.

Mark Todd: He certainly did not get the choc ice.

Mark Prisk: I did not.

John McWilliam: Order. Sedentary interventions are always to be deplored: they are rarely as funny as people think they are. The hon. Member for Hexham (Mr. Atkinson) had part of ''Robin Hood: Prince of Thieves'' filmed in his constituency, and the right hon. Member for Berwick-upon-Tweed (Mr. Beith) had ''Harry Potter'', but the only film made in my constituency was ''Get Carter''.

Mark Prisk: I shall not even try to compete with you, Mr. McWilliam. It would be dangerous to do so—certainly if I want to get called in any future debates.
 So far, the clause has been considered in the context of the film industry, but it affects any partnership and reaches way beyond the film sector. What assessment has been made of its impact outside the film sector? Earlier, we touched on business angels. They are particularly important in, for example, the theatre sector. I would appreciate it if the Financial Secretary could clarify what thought the Treasury has put into the impact. Was casting the net this wide intentional, and if it was, has a regulatory impact assessment been commissioned to assess exactly how the provisions will work? 
 In new section 118ZH, a benchmark of 10 hours is set. That seems clear in one sense, but it is inevitably somewhat arbitrary, especially, for example, in the case of parallel partnerships. As many members of the Committee will realise, professional firms quite often create a side partnership to draw in a specialist in a particular niche in their profession. Creating such a partnership allows them to do that without the complication of restructuring an existing partnership. Members of the Committee will be familiar with that arrangement operating in the fields of accountancy, law, and in particular in the environmental trades and professions, such as surveying, architecture and planning. Would it not be logical to recognise that that takes place, instead of having a 10-hour fixed benchmark that is somewhat arbitrary? That benchmark will clearly cause significant problems in the tax affairs of the partnerships to which I referred. 
 There is a further danger with the rigid nature of the benchmark: it could discriminate against someone on maternity or paternity leave. In most circumstances, the end of the financial year is 30 April, so where a person goes on maternity leave on 1 July of a tax year through to the following May, and even if they were able to manage seven hours in a working day in the 40 days before they took leave in the July, they would still be treated as if they had done five and a half hours per week.

Rob Marris: On a point of order, Mr. McWilliam. The hon. Gentleman seems to be citing examples from a brief from Grant Thornton, but he has not attributed them.

John McWilliam: It is not necessary for anybody to attribute anything really. I have no idea what brief the hon. Gentleman is citing examples from, since with any briefs sent to me my staff have instructions to send a note back stating that I do not read them because I am chairing the Committee.

Mark Prisk: I am perfectly happy to say that I have read the brief, but I am also aware that the Financial Secretary has recently been on maternity leave. Many hon. Members know about that, including the hon. Member for Wolverhampton, South-West (Rob Marris).
 In circumstances in which someone is judged to have worked five or six hours a week, if that partnership incurs a loss, the new parent could be at a disadvantage because of the inflexibility of the clause. I cannot believe that that was the Government's intention, so is the Financial Secretary prepared to account for it? 
 The clause highlights the general mistake of a tax avoidance strategy that is founded on trying to catch every possible activity in the knowledge that it will probably hurt a small number of legitimate activities but will inevitably have to operate in that way because it is trying to catch every last pound. 
 The Opposition do not reject the argument that abuse of the tax system should be dealt with. However, the danger of the catch-all approach in this clause and others is that a significant minority will be penalised.

Rob Marris: The hon. Gentleman was citing the example provided by Grant Thornton. I did not hear him cite the concluding sentence of that paragraph dealing with the potential difficulties of the situation outlined in the example. It goes on:
''Otherwise the losses will be carried forward and treated as current-year trading losses.''
 That suggests to me that someone on maternity leave could use the losses unless they gave up their role in the partnership or went on another maternity leave.

Mark Prisk: I am happy to return to that point, because the hon. Gentleman is right to say that there is a possible opportunity for avoidance. That is where the difficulty lies, however. How does one draw the line in a way that is not unfair? I am not sure that the clause does that, and that is why I want to hear from the Financial Secretary.

Ruth Kelly: It is an interesting argument that somehow individuals should get more tax relief than the amount that they put into a partnership. It is quite a difficult argument to make. We are not removing the right to tax relief; we are just saying that one cannot use it to the extent that it is greater than the sum originally contributed to the partnership. As profits accumulate, losses can be set aside in future years.
 The hon. Gentleman argues that legitimate trade could be affected, but we have received no representations whatever from anyone whom he thinks might be affected. No representation was made by the British venture capital industry or by individual business angels or people with the sorts of cases that he cites. We simply do not accept that 
 legitimate trade could be affected in the way that he suggests.

Mark Prisk: We all receive representations and we have to balance those that we receive with those that we do not. This year in particular, all the outside bodies have highlighted the fact that many people had significant difficulty responding to the clauses because the Bill was published on Maundy Thursday. We do not know whether the end result will be poor, but problems may well arise in due course and the rigidity of the drafting of some clauses is more likely to create problems than some flexibility would. I hope that the Financial Secretary can respond positively to that.

Ruth Kelly: I do not accept that they are drafted in a rigid way. I will turn to the 10-hour test in a moment. Let me first consider some of the other points raised by the hon. Gentleman.
 The hon. Gentleman asked whether we have done a regulatory impact assessment, but it is not Treasury practice to carry out an RIA for anti-avoidance measures, as I am sure he understands and realises. He also suggests that the industry desires certainty, and that it seeks a permanent new relief to provide that certainty. We think that the Budget announcement gives the industry the certainty that it is seeking to 2005 and beyond. As we have said, we are working in full co-operation with the industry to design a new permanent tax credit. That point has been widely welcomed by the industry and should provide the additional certainty that the hon. Gentleman desires. 
 Most of the detail of the measures before us was announced on 10 February, so organisations and individuals have had a fair amount of time to study them and make representations to us. It is an important point that no representations whatsoever have been made by people or organisations who think that this measure could affect legitimate trading activity.

Mark Prisk: I appreciate that the Financial Secretary is standing in for the Paymaster General, but she may find the Treasury has received at least one representation. The important point here, though, is not necessarily whether there have been one or two representations, but the concern that many people are not clear about the impact of the measure because of the length and nature of the legislation. We need an assurance from the hon. Lady that the Treasury—not just the other Departments—will monitor the impact and respond if it is clear that it is not having the desired effect. I hope that she will respond to that point.

Ruth Kelly: We do, of course, keep all tax measures under review and monitor the impact of tax legislation in particular fields. We will continue both to do that and to listen to any representations about the impact. However, I put it to the hon. Gentleman that the intent of the legislation is very easy to understand. The concept is simple: it is not possible to have loss relief against one's general income for more than the amount that one has actually put into the business, and anyone who can understand that can work out whether they are affected. Clearly, to give effect to that, the legislation is more complex.
 The hon. Gentleman asks about the 10-hour rule. Most people involved in the avoidance schemes have no active involvement whatsoever in the businesses, but we have had to guard against attempts to dress up very minor activity—a few hours a week, for example—as active involvement. We feel that 10 hours is fair, and it strikes the right balance between allowing genuine part-timers to carry on without any effect and making sure that we tighten the net around the tax-avoiders.

Michael Jack: The Financial Secretary has said, with all the certainty that has required the rewriting of this clause, that she thinks 10 hours strikes the right balance. Will she, for my education and understanding, tell me what other options she looked at, and will she put on the record the reasons for rejecting them and fixing on 10 as, in her judgment, the right number?

Ruth Kelly: We could debate endlessly whether the rule should have used nine or 11 hours, but 10 struck us as a relatively sensible compromise that people could work with, and one that would prevent people from dressing up a few hours as active involvement in a business when really there was no involvement whatsoever. That compromise recognises that some people may, for example, work part-time or take maternity leave during the year.

Michael Jack: The reason I asked the question is that there are in statute law different definitions of part-time and full-time working. I was intrigued by this new definition, at 10 hours, of some-time working. Was there an effort to align the number with other delineations between part-time and full-time involvement, and if not, why not?

John McWilliam: Order. The right hon. Gentleman is referring to a subsection that in fact limits the 10-hour test to section 118ZE and nothing else. Therefore, his question is beyond the scope of the matter under discussion.

Michael Jack: On a point of order, Mr. McWilliam. I am sure that you will tell me if I am out of order, but is it not within the narrow confines of the matter under debate to ask a Minister why a particular number has been chosen and whether any attempt was made to import an existing concept from other statute law?

John McWilliam: I am afraid that we are stuck within the confines of the matter under debate. If the right hon. Gentleman is trying to suggest that this measure could affect anything else or that anything else could affect it, it is not out of order to ask the question. It would be out of order for the Minister to answer it outside the context of what is in the Bill.

Ruth Kelly: The fact is that the 10-hour test applies only to passive investors, who are not employees at all. We developed a definition that strikes a sensible and fair balance between those who are covered by it and others who may work in a different way.
 The hon. Member for Hertford and Stortford says that the measure is unfair to those who work in more than one partnership and that there should be a rule to help such people. I do not think that that is a problem. 
Mr. Prisk rose—

Ruth Kelly: Perhaps the hon. Gentleman will listen to the explanation before I allow him to intervene.

Mark Prisk: I was not sure whether the Financial Secretary had finished with the question of the time limitation in the subsection to which you referred, Mr. McWilliam.
 I am not entirely clear what consideration has been given to the special role of business angels, whose involvement is often passive. They make a capital investment and may occasionally contribute expertise at the beginning of a project, particularly in the creative sector, but then rightly step back. Their aim is not to run things; they do not have an executive or salaried role. I am genuinely worried that that group will be drawn in unintentionally. There may be a conflict with Department of Trade and Industry rules. What assessment was made of the impact on those people and that sector?

Ruth Kelly: It is difficult to conceive circumstances in which legitimate business angel activity would be caught by the measure, because it is difficult to conceive a situation in which a business angel investor or anyone, other than those who are seeking a tax advantage, would want losses attributed to them that were greater than their contribution to the venture or partnership. I am sure that the hon. Gentleman agrees with the logic of that argument. The measure was specifically designed to counter tax avoidance.
 To return to the 10-hour test, I can tell the Committee that it applies only to passive investors, and the new rule still allows someone to claim sideways loss relief up to the amount of their financial contribution. If people genuinely contribute their time, skills or money, they will not be affected. If they are affected, losses can be offset against later profits from the same trade. I believe that that directly relates to the hon. Gentleman's point. For those reasons, I urge members of the Committee to support the clause.

Michael Jack: On a point of order, Mr. McWilliam. I have listened with interest to the debate on the clause. The Financial Secretary said on several occasions in her remarks on the amendments that the matter is one of tax avoidance. I was surprised that she did not in even a sentence or two explain some of the deficiencies in the drafting of the original legislation. What was wrong in the first place?
 The hon. Lady has assured us of the correctness of the Government's position in rebutting the line of argument put forward by my hon. Friend the Member for Hertford and Stortford in favour of his amendments, on the grounds of her absolute certainty that everything in the clause is right, and therefore my hon. Friend's amendments are wrong. However, I am sure that that line was adopted when the original legislation was put to the House, so I am doubtful about how right it is. She has not told us what went wrong in the first place or why we now have several pages of legislation to fix it. My hon. Friend sought to improve the provisions through his amendments, yet the Financial Secretary tells us that 
 she is as certain now as she was when the original legislation was passed.

John McWilliam: Order. The right hon. Gentleman was not present for the debate on amendments Nos. 183 and 182, so he did not have the benefit of listening to the Minister. We are dealing with the clause stand part, not the amendments, which have been disposed of.
 Question put and agreed to. 
 Clause 119 ordered to stand part of the Bill. 
 Clause 120 ordered to stand part of the Bill.

Clause 121 - Charge to income tax

Question proposed, That the clause stand part of the Bill.

Mark Prisk: I do not intend to detain the Committee too long—[Interruption.] I hear sounds of disappointment.
 The clause concerns the tax charge for individuals exiting a partnership. As the Financial Secretary is aware, the tax law rewrite project, which has support from across the House, has as one of its aims a reduction in the number of charges, so it is quite clear that that is Government policy. Would it therefore not make more sense if in this clause the charge to tax was under case I of schedule D and not under case VI? I have received a number of representations on this point and although I do not profess to be an expert on the tax law rewrite project, it seems to be a prima facie point to raise. What is the Government's view?

Ruth Kelly: The clause is part of the same anti-avoidance measure as clause 120. It sets out when a charge to tax can arise under the measure and how to calculate the amount that is chargeable to tax. In calculating the amount to be charged, the clause makes clear the link between the losses relieved against income tax and the amount received, and ensures that tax is charged at the same rate as the rate of relief for the earlier trading losses. It is normal practice for anti-avoidance charges to be made under case VI so that the charge to tax is fully effective and not reduced by other losses or reliefs. If we changed the basis to case I, which is a charge for trading profits, it would, for example, allow the partnership to set up a new scheme, under which the losses might be restricted by clause 119, and then claim the balance of those losses against the exit charge. That would defeat the Bill's intention and allow yet more avoidance. For that reason, I hope that the hon. Gentleman will support the clause.
 Question put and agreed to. 
 Clause 121 ordered to stand part of the Bill. 
 Clauses 122 to 124 ordered to stand part of the Bill.

Clause 125 - Companies in partnership

Mark Prisk: I beg to move amendment No. 190, in
clause 125, page 109, line 10, at beginning insert 'relevant'.

John McWilliam: With this it will be convenient to discuss the following:
 Amendment No. 191, in 
clause 125, page 109, line 32, after 'include', insert 'any chargeable gains or'.
 Government amendments Nos. 184 to 187. 
 Government new clause 12—Relationship with chargeable gains.

Mark Prisk: I am aware that there may be some overlap between the Government amendments and those in my name, not least because of the order in which they were tabled.
 Amendments Nos. 190 and 191 seek to limit the clause to those circumstances in which arrangements have been put in place to divert income to non-taxable persons. I am particularly grateful to members of the Law Society, who have highlighted some of the issues. The new rules in the clause are intended to counteract the particular scheme under which a UK corporate taxpayer gets an excess in their capital withdrawals, which results from an arrangement under which they are not allocated a proportion of the income profits to a partnership which they would have otherwise have received. Where that occurs, a charged tax under schedule D6 is imposed on the UK taxpayer which cannot be mitigated by using capital losses. In addition, no credit is given for that charge against a tax that may arise because the increased capital has been allocated to that partner. 
 I appreciate that the Inland Revenue may not believe that that is double taxation. The worry for others is that the provisions written in the legislation are what they have to go by, and they are concerned that no distinction has been made on that basis. I hope that the Financial Secretary can assure us on the following point, which causes the worry: it is quite possible that a UK corporate taxpayer may be taxed under the provisions by reference to income, but they are also taxed while the income is with another UK resident partner. That is the essential problem, which causes the worry. 
 The purpose of the amendments is to narrow the clause. To avoid inadvertently catching bona fide arrangements, the provisions should be limited to circumstances in which income has been allocated—other than in accordance with partnership capital—to partners who are not liable to be taxed on that income. It is a complicated point, and I must confess that I am not sure I am any more expert on it than I was a few weeks ago. I confirm that the amendment's purpose is to probe the Government's intention.

Ruth Kelly: I shall ask the Committee to reject the amendment, but it may help if I first explain the intention behind the clause. Clauses 125 and 126 tackle certain avoidance schemes used by companies. The schemes use a partnership structure to convert taxable profits into untaxed increases in a partnership capacity. They allocate partnership profit shares in different proportion to partnerships' capital shares; for example, a company may give up all rights to income in return for a greater share of capital, then withdraw its increased capital from the partnership with little or no tax to pay.
 Clause 125 returns the position to what it would have been if profits had been allocated in proportion to partnership capital. When the company realises the increase in capital, it will pay corporation tax on the profits that it would have earned with reference to its partnership share. Those schemes threaten to cost the Exchequer a significant amount of corporation tax each year and the Government are determined to tackle them to protect the interests of genuine businesses and the majority of taxpayers who pay their fair share.

Michael Jack: For the avoidance of doubt, will the Financial Secretary put on record how much tax is at risk, and how many partnerships were investigated to determine that number?

Ruth Kelly: I shall deal with the precise figures later in my contribution. First, I turn to amendment No. 190, which would add the word ''relevant'' so that ''profit'' becomes ''relevant profit''. Our advice from parliamentary counsel is that the meaning is clear without the amendment. Relevant profit is clearly defined and the later reference to profit in the same sentence can only be a reference to the relevant profit mentioned earlier in the sentence. There is no need for further qualification.

Mark Prisk: Is the Financial Secretary saying that there are no circumstances in which the profit would be irrelevant?

Ruth Kelly: I am saying that the definition is clear in that ''profit'' refers to the relevant profit mentioned earlier in the sentence. I hope that the hon. Gentleman will be reassured on that point and that he will withdraw his amendment.
 Amendment No. 191 would have no practical effect. It seeks to exclude from the meaning of ''relevant profit'' any chargeable gains arising from partnership of assets. However, the term ''relevant profit'' involves considering the shares of partnership profits allocated between the members of a partnership and refers to the partnership's commercial profits, not to the profits for tax purposes. In contrast, chargeable gains are purely a taxation concept. Excluding them from the business profits of a partnership makes no sense, as they are not part of those profits in the first place. I therefore hope that the hon. Gentleman will not press his amendments. If he does, I will ask my hon. Friends to reject them. 
 The Government amendments and new clause correct technical points that were raised in representations on the Bill. Their purpose is to ensure that new world rules interact correctly with the rules for computing chargeable gains. They ensure that there is an appropriate link to the rules for chargeable gains. The majority of schemes do not involve assets that might give rise to a chargeable gain, but, where they do, the amendments and the new clause will ensure that there is no double charge to tax. I know that the hon. Gentleman is concerned about that. That is achieved, first, by ensuring that the amount charged under clause 125 reads through correctly to the chargeable gains rule and, secondly, by deducting any amount that is charged to 
 corporation tax by the clause. Those schemes cost at least £75 million annually, but we believe that more such schemes could be brought into play if the loophole were not closed. So the potential loss to the Exchequer is much greater than £75 million, and revenue would be put at risk.

Michael Jack: I am grateful for that figure. Will the Financial Secretary tell the Committee whether any analysis was done as to why the loopholes were not spotted when the clause was drafted?

Ruth Kelly: As I am sure you know, Mr. McWilliam, as do my hon. Friends, avoidance schemes are often updated and new schemes introduced, and the Revenue reacts accordingly. I am surprised that the right hon. Gentleman does not know that. A particular avoidance scheme has emerged and we have decided to close the loophole to secure revenue for the Exchequer in future years. That is perfectly reasonable, and I expect that my hon. Friends, at least, agree with our approach.

Rob Marris: Like the hon. Member for Hertford and Stortford and many of my hon. Friends, I do not understand the precise technicalities of some of the clauses, and of the amendments in particular. The hon. Gentleman referred to the brief from the Law Society, of which I am a member. I am slightly surprised at amendment Nos. 190 and 191, which were tabled by the hon. Gentleman and by his friends. The Law Society proposed two amendments to the clause, neither of which are the amendments tabled by the hon. Gentleman.

John McWilliam: If the hon. Gentleman is a member of the Law Society, he ought to declare that membership.

Hon. Members: He did.

Mark Prisk: I do not want to intrude on the relationship between the hon. Gentleman and the Law Society, which is clearly complicated. It is important that, where amendments are tabled, it is because one feels that they have strong merit. I feel that all the amendments that have been tabled fall into that category.

Rob Marris: Will the hon. Gentleman explain why he tabled his amendments and not the two suggested by the Law Society?

John McWilliam: Order. The hon. Member for Hertford and Stortford does not have to do any such thing. It is his choice entirely.

Mark Prisk: Thank you, Mr. McWilliam. I happily declare that I am not a member of the Law Society.
 I thank the Financial Secretary for explaining the background to some of the Government's thoughts. I am not entirely sure whether the relevant/irrelevant debate has clarified the matter for those outside who are affected, but it has been helpful. 
 There is one matter on which I am still not clear; the Financial Secretary may be able to clarify it. There are instances when the income and capital of a partnership are not related to the capital contributions originally 
 made. One of the worries with the new clause and the amendments is that organisations, whether capital funds or whatever, may give a general partner a priority share of income to cover expenses and so on, but there will not be the matching of income and capital. The worry is that in trying to deal with those two aspects, there will not be any effort or opportunity for the tax system to recognise the existing conventional or commercial arrangements. One of the dangers when a tax system is a catch-all approach to tax avoidance with rigid rules is that a number of legitimate activities may also be caught up in that process. 
 However, having said that and having made it clear that the purpose of amendments Nos. 190 and 191 was to probe the Government's intention, I beg to ask leave to withdraw the amendment. 
 Amendment, by leave, withdrawn. 
 Amendments made: No. 184, in 
clause 125, page 109, line 49, leave out 'the lower of' and insert 
 '(subject to subsections (6) and (7)) so much of A as does not exceed B, where'.
 No. 185, in 
clause 125, page 110, line 1, at beginning insert 'A is'.
 No. 186, in 
clause 125, page 110, line 5, at beginning insert 'B is'.
 No. 187, in 
clause 125, page 110, line 9, leave out subsection (6) and insert— 
 '(6) Subsection (7) applies if this section applies on more than one occasion in relation to the same company and partnership (whether because of two or more receipts by the company of consideration relating to the same disposal or for any other reason). 
 (7) On each occasion after the first, the amount found under subsection (5) shall be reduced (but not below nil) by the total of the chargeable amounts found (under that subsection read with this) on the previous occasions.'.—[Ruth Kelly]
 Clause 125, as amended, ordered to stand part of the Bill 
 Clause 126 ordered to stand part of the Bill.

Clause 127 - Finance leasebacks

Ruth Kelly: I beg to move amendment No. 158, in
clause 127, page 112, leave out lines 20 to 23 and insert— 
 '(1) This section applies in relation to the calculation of the lessor's income or profits for a period of account for the purpose of income tax or corporation tax. 
 (1A) Where— 
 (a) an amount receivable in respect of the lessor's interest under the leaseback falls to be taken into account in that calculation, and 
 (b) that amount is reduced by an amount due to the lessee under the leaseback, 
 that reduction shall be disregarded when taking the amount receivable into account. 
 (1B) The amounts receivable in respect of the lessor's interest under the leaseback that fall to be taken into account in that calculation may be disregarded to the extent that they exceed the permitted threshold (whether or not subsection (1A) applies).'.

John McWilliam: With this it will be convenient to discuss Government amendments Nos. 159 to 181.

Ruth Kelly: This is a series of technical amendments to clause 127 and schedule 23, the purpose of which is to ensure that the Bill has the effect that was intended at the time of the Budget announcement. To help the Committee, I shall explain the purpose of the clause and schedule before moving on to explain the purpose of the amendments.
 The purpose of clause 127 and schedule 23 is to bring an end to two tax avoidance schemes involving sale and leaseback or lease and leaseback of plant and machinery. Those schemes allowed businesses to obtain an unintended tax advantage by permitting them to claim relief twice for the cost of the plant and machinery. Giving relief twice for the same expenditure is clearly not justifiable. The measure removes the unintended tax advantages by restricting them to those rentals paid under the leasing arrangement. The result is that the cost of the plant or machinery is relieved once and once only. 
 Corresponding adjustments are made to ensure that lease rentals that are disallowed in tax computations or the business that pays them are not taxed in the hands of the recipient. The clause contains the basic rules for the new measure and the schedule contains transitional provisions to ensure that the new measure applies fairly to existing schemes. Stopping this avoidance will bring in an estimated Exchequer yield of £295 million over three years: £75 million this year and £110 million in each of the following two years. 
 I turn now to the amendments. The measure applies to complex business arrangements, and after the Bill was published discussions between officials and professional bodies identified some technical defects that should be put right to ensure that the rules will operate as we intended. We are grateful to all concerned for giving up their time to help us to get the measure right. The amendments also include anti-avoidance provisions to ensure that the new rules operate fairly and cannot be avoided. The amendments do not make any change to the policy underlying the measure, but if they were not made the measure would not be as effective or as fair as it should be. I therefore commend the amendments to the Committee.

Rob Marris: On a point of order, Mr. McWilliam. Your selected amendments refer to Government amendment No. 181. Will you clarify whether that is intended to be No. 161, because No. 181 refers to schedule 23?

John McWilliam: Because the schedule arises out of the clause and because of the principle that we have only one argument on anything, the debate takes part on the clause, even though some of the amendments are to the schedule. Those amendments will be formally moved when we get to the schedule.

Mark Prisk: I know that we are all grateful to you for steering our deliberations, Mr. McWilliam.
 As the Financial Secretary said, the clause must be considered with schedule 23, which underscores the point that you have just made, Mr. McWilliam. The clause seeks to close down those structures that involve sale and leaseback or lease and leaseback of plant and machinery, which is an important aspect for many of 
 our more capital-intensive industries. The structures to which the Financial Secretary referred are those businesses that seek to obtain one deduction for the lease payment and one for the capital allowance. I accept that it was an unintended consequence of earlier legislation, and I therefore recognise that the measure's intent has some merit. 
 Once the Bill was published there were a series of hurried meetings between the Treasury and industry, and if my maths serves me well the results of those are the 20 Government amendments before us. It is a shame that the matter could not have been sorted out before the Bill was published, but I have examined the amendments—some are technical and some have a broader application—and it appears that most of the concerns of those affected by the clause and schedule have been satisfied. For example, one amendment that I considered tabling would have dealt with the question of the net book value and the current book value, and, wearing my chartered surveyor's hat momentarily, I am pleased to see that that has been included. 
 I do not want to detain the Committee, but we have some concerns about the application of the provisions and their potential impact on bona fide arrangements in a complex field, and especially for the lease and leaseback of plant and machinery. As long as we gain complete assurance that consultations will continue, we will not oppose the amendments in principle.

Howard Flight: There were concerns that the measures would be retrospective for people who had already entered into sale and leaseback arrangements, and I would be interested to know whether the amendments address that issue.

Ruth Kelly: I thank the hon. Member for Hertford and Stortford for the way in which he accepted the amendments, and I apologise for the fact that so many were needed. Clearly, it is a complex area that quite recently came to our attention, and we needed to get it right. We have consulted and we will continue to do so to ensure that there are no more unintended consequences, but we do not believe that there are. As he said, representatives of organisations believe that we have tackled the problem fairly and reasonably, with the underlying policy intention being well served.
 Will innocent transactions be caught? Commercially driven transactions will be within the legislation, but they will be tackled fairly and without the double benefit that could arise under existing rules. Hon. Members will accept that that was never the intention of the original legislation, and that it should stop. The provision will not affect the tax treatment of rental payments due for Budget day, to answer the point raised by the hon. Member for Arundel and South Downs (Mr. Flight). Nor will it affect the tax treatment of payments due after Budget day if they relate to periods before that day, so I do not believe there is any retrospective activity associated with this legislation. I therefore commend it to the Committee. 
 Amendment agreed to. 
 Amendments made: No. 159, in 
clause 127, page 112, leave out lines 40 to 44.
 No. 160, in 
clause 127, page 113, line 35, leave out from 'machinery' to end of line 36.
 No. 161, in 
clause 127, page 113, line 39, at end insert— 
 '( ) Plant or machinery is not the subject of a lease and finance leaseback for the purposes of this section in any case where the condition in subsection (6)(c) is met only because of an election under section 199 made before 18 May 2004.'.
 No. 162, in 
clause 127, page 113, line 46, at end insert— 
 '228G Leaseback not accounted for as finance lease in accounts of lessee 
 (1) Sections 228B and 228C are subject to this section in their application in relation to a leaseback that is not accounted for as a finance lease in the accounts of the lessee. 
 (2) Subsection (3) applies where the leaseback is accounted for as a finance lease in the accounts of a person connected with the lessee; and in that subsection ''relevant calculation'' means the calculation of— 
 (a) the permitted maximum for the purposes of section 228B, or 
 (b) the amount by which the income or profits of the lessee are to be increased in accordance with section 228C. 
 (3) Where an amount that falls to be used for the purposes of a relevant calculation— 
 (a) cannot be ascertained by reference to the lessee's accounts because the leaseback is not accounted for as a finance lease in those accounts, but 
 (b) can be ascertained by reference to the connected person's accounts for one or more periods, 
 that amount as ascertained by reference to the connected person's accounts shall be used for the purposes of the relevant calculation. 
 (4) Subsections (5) and (6) apply in a case where the leaseback is not accounted for as a finance lease in the accounts of a person connected with the lessee. 
 (5) Sections 228B and 228C do not apply in relation to the leaseback. 
 (6) If the term of the leaseback begins on or after 18 May 2004 then, for the purposes of income tax or corporation tax, the income or profits of the lessee from the relevant qualifying activity for the period of account during which the term of the leaseback begins shall be increased by— 
 (a) the net consideration for the purposes of section 228C(3) (in the case of a sale and finance leaseback), or 
 (b) the consideration referred to in section 228F(6)(b) (in the case of a lease and finance leaseback). 
 (7) For the purposes of this section the leaseback is accounted for as a finance lease in a person's accounts if— 
 (a) the leaseback falls, under generally accepted accounting practice, to be treated in that person's accounts as a finance lease or loan, or 
 (b) in a case where the leaseback is comprised in other arrangements, those arrangements fall, under generally accepted accounting practice, to be so treated.'.
 No. 163, in 
clause 127, page 114, leave out line 1 and insert— 
 '228H Sections 228A to 228G: supplementary'.
 No. 164, in 
clause 127, page 114, line 2, leave out '228F' and insert '228G'.
 No. 165, in 
clause 127, page 114, line 3, leave out 'current' and insert 'net'.
 No. 166, in 
clause 127, page 114, line 25, leave out '228F' and insert '228G'.
 No. 167, in 
clause 127, page 114, line 33, leave out '228F' and insert '228G'.
 No. 168, in 
clause 127, page 114, line 37, at end insert— 
 '228J Plant or machinery subject to further operating lease 
 (1) This section applies where— 
 (a) plant or machinery is the subject of— 
 (i) a sale and finance leaseback, or 
 (ii) a lease and finance leaseback, and 
 (b) some or all of the plant or machinery becomes, while the subject of the leaseback, also the subject of a lease in relation to which the following conditions are met— 
 (i) the term of the lease begins on or after 18 May 2004; 
 (ii) S, or a person connected with S, is the lessee under the lease; 
 (iii) the lease is not accounted for as a finance lease in the accounts of the lessee. 
 (2) For the purpose of income tax or corporation tax, in calculating the lessee's income or profits for a period of account the amount deducted in respect of amounts payable under the operating lease shall not exceed the relevant amount. 
 (3) Subsections (4) and (5) apply in relation to the calculation of the lessor's income or profits for a period of account for the purpose of income tax or corporation tax. 
 (4) Where— 
 (a) an amount receivable in respect of the lessor's interest under the operating lease falls to be taken into account in that calculation, and 
 (b) that amount is reduced by an amount due to the lessee under the operating lease, 
 that reduction shall be disregarded when taking the amount receivable into account. 
 (5) The amounts receivable in respect of the lessor's interest under the operating lease that fall to be taken into account in that calculation may be disregarded to the extent that they exceed the relevant amount (whether or not subsection (4) applies). 
 (6) Where only some of the plant or machinery is the subject of the operating lease, subsections (2) to (5) shall apply subject to such apportionments as may be just and reasonable. 
 (7) For the purposes of this section a lease is accounted for as a finance lease in a person's accounts if— 
 (a) the lease falls, under generally accepted accounting practice, to be treated in that person's accounts as a finance lease or loan, or 
 (b) in a case where the lease is comprised in other arrangements, those arrangements fall, under generally accepted accounting practice, to be so treated. 
 (8) In this section— 
 ''lease and finance leaseback'' has the meaning given in section 228F; 
 ''lessee'' means the lessee under the operating lease; 
 ''lessor'' means the lessor under the operating lease; 
 ''operating lease'' means the lease referred to in subsection (1)(b); 
 ''relevant amount'' means an amount equal to the permitted maximum under section 228B as it applies in relation to the leaseback.'''.
 No. 169, in 
clause 127, page 114, line 38, leave out '228G' and insert '228J'.—[Ruth Kelly.]
 Clause 127, as amended, ordered to stand part of the Bill.

Schedule 23 - Finance leasebacks: transitional provision

Amendments made: No. 170, in 
schedule 23, page 391, line 5, after 'subject to' insert 
 'paragraphs 2 to 8 of'.
 No. 171, in 
schedule 23, page 391, line 6, at end insert— 
 '( ) Paragraph 8A of this Schedule makes provision in relation to the taxation of chargeable gains where an existing leaseback terminates.'.
 No. 172, in 
schedule 23, page 391, leave out line 28 and insert— 
 'Basic Amount x (Notional Rental Deduction Deductible Excess) 
 Notional Rental Deduction'.
 No. 173, in 
schedule 23, page 392, line 34, at end insert— 
 '(1) Section 228C applies subject to this paragraph where— 
 (a) the existing leaseback terminates otherwise than by expiry of its term, and 
 (b) the amount calculated in accordance with section 228C(3) exceeds the relevant cap. 
 (2) In determining the amount by which income or profits are to be increased under section 228C(2), the amount calculated in accordance with section 228C(3) shall be disregarded to the extent that it exceeds the relevant cap. 
 (3) The relevant cap is— 
 (Original Consideration Relevant Rentals) x Net Consideration 
 Original Consideration 
 where— 
 ''Original Consideration'' has the same meaning as in section 228B; 
 ''Relevant Rentals'' means— 
 (a) the pre-commencement rentals, minus 
 (b) the total of— 
 (i) finance charges shown in the accounts for periods that end before 17 March 2004, and 
 (ii) the appropriate proportion of finance charges shown in the accounts for the transitional period of account; 
 ''Net Consideration'' has the same meaning as in section 228C.'.
 No. 174, in 
schedule 23, page 393, leave out lines 15 to 17 and insert— 
 '(4) For the purposes of sub-paragraphs (2) and (3) there is a taxable disposal if, during the period of six years beginning with the date of termination of the leaseback— 
 (a) the whole of the plant or machinery is the subject of a disposal event (within the meaning of Part 2), or 
 (b) part of the plant or machinery is the subject of such a disposal event.'.
 No. 175, in 
schedule 23, page 393, line 22, leave out from 'shall be' to ' ''Disposal' in line 26 and insert '— 
 (i) in a case falling within sub-paragraph (2)(b), the relevant fraction of the amount calculated in accordance with section 228C(3), or 
 (ii) in a case falling within sub-paragraph (3)(b), the relevant fraction of the section 226 restriction. 
 (6) In sub-paragraph (5)(b)(i) and (ii) ''relevant fraction'' means— 
 (Disposal Proceeds Restricted Qualifying Expenditure) 
 (Lessee Acquisition Expenditure Restricted Qualifying Expenditure) 
 where'.
 No. 176, in 
schedule 23, page 393, line 27, leave out from second 'the' to '; but' in line 29 and insert 
 'taxable disposal or, if higher, the market value of the plant or machinery at the time of the taxable disposal'.
 No. 177, in 
schedule 23, page 393, line 35, at end insert— 
 '(6A) Where there is a taxable disposal by virtue of sub-paragraph (4)(b), this paragraph applies in relation to that disposal with the following modifications— 
 (a) references in sub-paragraphs (5)(a) and (6) to the plant or machinery shall be taken to be references to the part of the plant or machinery comprised in the taxable disposal; 
 (b) the amount by which profits or income are to be increased by virtue of sub-paragraph (5)(b) shall be the partial disposal fraction of the amount given by sub-paragraph (5)(b)(i) or (ii); 
 (c) the partial disposal fraction of the restricted qualifying expenditure and of the lessee acquisition expenditure shall be used for the purposes of sub-paragraph (6) instead of those amounts of expenditure. 
 (6B) For the purposes of sub-paragraph (6A) the partial disposal fraction is— 
 Apportioned Lessee Acquisition Expenditure 
 Lessee Acquisition Expenditure 
 where ''Apportioned Lessee Acquisition Expenditure'' means so much of the lessee acquisition expenditure as was attributable to the acquisition of the part of the plant or machinery comprised in the taxable disposal.'.
 No. 178, in 
schedule 23, page 394, line 12, leave out 'rental deduction' and insert 'taxed rental'.
 No. 179, in 
schedule 23, page 394, line 14, leave out 'rental deduction' and insert 'taxed rental'.
 No. 180, in 
schedule 23, page 394, line 32, leave out 'deduction' and insert 'rental'.
 No. 181, in 
schedule 23, page 395, line 24, at end insert— 
 'Chargeable gains 
 8A (1) Sub-paragraph (2) applies where— 
 (a) an existing leaseback is the leaseback in a lease and finance leaseback, 
 (b) the leaseback terminates, 
 (c) on or after the termination there is a disposal, by the user, of the whole or part of the plant and machinery subject to the leaseback, and 
 (d) a chargeable gain that accrues on that disposal (''the relevant chargeable gain'') falls to be taken into account for the purposes of a chargeable gains computation. 
 (2) The following fraction of the relevant chargeable gain shall instead be taken into account for the purposes of the chargeable gains computation— 
 (Net Rentals Termination Charge) 
 Lease Premium 
 where— 
 ''Net Rentals'' means— 
 (a) the total of the amounts deducted in calculating the user's income or profits, for the purpose of income tax or 
corporation tax, in respect of amounts payable under the leaseback, minus 
 (b) the total of the amounts shown in the user's accounts in respect of finance charges relating to the leaseback;
''Termination Charge'' means the amount by which the user's income or profits are to be increased by virtue of section 228C(2) of the CAA 2001 because of the termination;
''Lease Premium'' means the consideration relating to the leaseback referred to in section 228F(6)(b) of the CAA 2001.
(3) References in this paragraph to termination of the leaseback shall be construed in accordance with section 228H(1) of the CAA 2001. 
 (4) In this paragraph— 
 ''CAA 2001'' means the Capital Allowances Act 2001; 
 ''chargeable gains computation'' means the computation, for the purposes of the TCGA 1992, of the total amount of chargeable gains that accrue to the user in any chargeable period that ends on or after 17 March 2004; 
 ''disposal'' shall be construed in accordance with the TCGA 1992; 
 ''lease and finance leaseback'' has the same meaning as in section 228F of the CAA 2001; 
 ''TCGA 1992'' means the Taxation of Chargeable Gains Act 1992; 
 ''user'' means the person who is the lessee under the leaseback.'.—[Ruth Kelly.]
 Schedule 23, as amended, agreed to.

Clause 128 - Manufactured dividends

Question proposed, That the clause stand part of the Bill.

Howard Flight: The clause and the accompanying schedule comprise various anti-avoidance measures that I would describe as an entirely fair cop. There is nothing in them that is retrospective, and I have not been able to identify laziness in transactions tort. Therefore, we have no comments to make.
 Question put and agreed to. 
 Clause 128 ordered to stand part of the Bill. 
 Schedule 24 agreed to.

Clause 129 - Gilt strips

Question proposed, That the clause stand part of the Bill.

Andrew Tyrie: My reaction to the clause is only a little less perfunctory than that of my hon. Friend the Member for Arundel and South Downs to the previous clause. It attempts to close what could reasonably be called a minor racket, which is the use of gilt strips for tax avoidance.
 The anti-avoidance measures were originally announced in January 2004. The idea derives from the fact that the value of the bond is stripped into income and capital, the principal strip and the coupon strip. The opportunity for tax avoidance arises because non-corporate holders of the strips are deemed to have disposed of and reacquired the strip at the end of the tax year at market value, which gives an opportunity for loss relief. 
 I agree with the intended effect of the clause. My only questions relate to whether we get that effect. It is a very long anti-avoidance clause. Compared to clause 128, which is three and a half lines, we have here four and half pages, or 275 lines of anti-avoidance legislation. I have a couple of questions. I ask the easy one first. Do the Government know how much yield they are protecting with this anti-avoidance legislation? How prevalent are the schemes? Gilt strips are about 2 or 3 per cent. of the total bond market, which is about £180 billion. What proportion of the strips market is being used for anti-avoidance purposes? That would give us a rough answer. 
 The second question is slightly more complicated. In order to clamp down on the problem, the clause creates a definition of market value in subsection (8). The definition strikes me as a bit odd. For example, new paragraph 14E(2) in that subsection states: 
''The market value on any day of a strip or security quoted in the Daily List shall be—
(a) the lower of the two figures shown in the Daily List for the strip or security for that day''.
 There may be more than one price on any one day. Indeed, there may be wide variations in price, particularly if large transactions have gone through. Then there is the problem of computer-mapped market prices, under which the price may move around hugely during the day. The new paragraph refers to the list price. Other parts of the measure imply that there may not even be a list price, and the Government tacitly acknowledge that. 
 New sub-paragraphs (8) and (9) contain the sort of catch-all provisions that all too often act as a substitute for clarity of thought, and can give rise to a great deal of discontent later, in this case, about the definition of the market price. I would be grateful if the Financial Secretary commented on that and on whether she is sure that new sub-paragraphs (8) and (9) are needed if the definition of market price earlier in the new paragraph is right. 
 Those are technical points, and the Financial Secretary cannot be expected to know every detail of anti-avoidance legislation of this type. She is a very thorough Minister, but I do not expect her to have all the answers at her fingertips. She may have them, but I would not be in the least concerned if she did not. As a general point, I wonder whether this kind of scrutiny would not be better done in some Special Standing Committee, although I realise that saying that is considerably beyond the scope of this debate.

David Laws: We, too, support clause 129, which deals with a particularly serious form of tax avoidance. I wish to seek clarification from the Financial Secretary on a few points. First, can she provide the most up-to-date estimate of the cost of the tax avoidance? I am sure that she intended to deploy it in her speech in any case. Secondly, when was this form of avoidance identified by the Treasury and when were Ministers alerted to it? How long does she think it has been going on, and when were proposals first put to Ministers suggesting that the loophole be closed? How long ago was that suggestion first made?

[Mr. Mark Todd in the Chair]

Ruth Kelly: Ah! I welcome you to the Chair, Mr. Todd, and look forward to your expert guidance.
 I am delighted that members of the Committee recognise the serious form of tax avoidance that is at issue in the clause, which amends the law relating to the taxation of strips of Government bonds held by individuals and others liable to income tax and capital gains tax. The clause has two main purposes: to tackle aggressive tax-avoidance schemes and to prevent tax relief from being available for any loss of original capital invested in the strip. 
 The avoidance involves contrived deals to manipulate the cost or disposal proceeds of strips for tax purposes. The only purpose of such unwanted deals is to generate tax reductions at the expense of the Exchequer. The Government are committed to tackling such avoidance to ensure sure that everyone pays their fair share of tax. The changes will not affect genuine investors in any way. 
 Hon. Members have been interested in the yield at stake. We believe that the Exchequer has lost at least £200 million through that route. We believe that avoidance started around July 2003. My right hon. Friend the Chancellor was alerted in the first week of January this year and an announcement was made on 15 January—a quick reaction, I hope hon. Members will agree.

[Mr. John McWilliam in the Chair]
 On the technical issue of market value, why we have defined it and what definition we are using, currently, all strips of Government bonds are publicly quoted in the major stock exchange in the country of issue. Using that figure for market value, information is readily available and cannot be manipulated for tax purposes. 
 A regulatory power has been ceded to the legislation in case at some time in the future strips of a foreign Government are not quoted on a recognised stock exchange. The quoted price used is worked out in deals in-day, as reported via the Debt Management Office to the stock exchange list. I hope that that satisfies hon. Members and I ask my hon. Friends and other members of the Committee to support the clause. 
 Question put and agreed to. 
 Clause 129 ordered to stand part of the Bill.

Clause 130 - Life policies etc.:

Amendment made: No. 95, in 
clause 130, page 120, line 30, leave out '541(d)' and insert '541(1)(d)'.—[Ruth Kelly.]
 Question proposed, That the clause, as amended, stand part of the Bill.

Andrew Tyrie: I thought that this was going to be another clauses 128 and 129 job, and it nearly is, or at least it may well turn out to be. The clause is another anti-avoidance measure, and at first blush one might think it absolutely right to introduce the clause in
 principle. I am not absolutely convinced and I would like some further help from the Financial Secretary.
 The stated purpose of the clause is to restrict the use of corresponding deficiency relief. In fact, neither the clause nor the explanatory notes makes that clear. The main purpose of the clause could be much more simply stated. Unless I have misunderstood it, it is to prevent people trading losses in life insurance companies and annuity contracts. It is a little disingenuous not to make that clear in the explanatory notes, or perhaps it was a slip, but I am not entirely convinced of the case for the provision. 
 Why should people who have losses on such products, which may be damaging to them as they are of comparatively modest means, not sell them at a price that reflects the tax benefit for a seller lucky enough to be able use the tax loss to reduce his tax bill? All that would do is enable people who do not have the benefit of higher-rate tax liability to reap some of the tax benefit if they are unlucky enough to incur a loss, which will put them on the same footing as a wealthier taxpayer, or one whose experience with those products has been more fortunate. 
 The tax law rightly allows companies to trade losses. One can buy a company with an accumulated loss that it is carrying forward to consolidate it for tax purposes and to reduce the group's corporation tax liabilities. What is the logic of depriving individuals of that same benefit?

Ruth Kelly: The clause is an anti-avoidance measure. It is aimed at contrived schemes designed to reduce an individual's liability to higher rate income tax. The schemes use life insurance policies to manufacture a tax rule called deficiency relief. They artificially create substantial amounts of tax relief through a series of transactions that have no genuine economic purpose. The transactions are designed solely to ensure that individuals who acquire the policies pick up the tax relief at no cost to them other than the fees they pay for the use of the scheme.
 The schemes depend on a loophole that allows the taxpayer to claim deficiency relief in relation to earlier gains made by a previous owner of the policy, including gains that were not subject to tax at all. The clause closes that loophole. We have not had any representations stating that that would catch people unfairly. We are in the business of giving incentives to genuine economic relationships, but not the sort of transactions caught by the clause. 
 We estimate a yield to the Exchequer from the measure of £120 million over the next three years. If use of the schemes continued to grow, the loss of tax stemmed by the measure could be much higher. With such an amount at stake for no clear economic purpose, I am sure that the hon. Gentleman will understand that we need to close the loophole and will, therefore, choose to support the clause.

Andrew Tyrie: The Minister may well be right. Sometimes the Inland Revenue can get it wrong—

Jim Fitzpatrick: But not the Minister.

Andrew Tyrie: Of course not. One was trying to place the responsibility where it should lie. I wonder whether the Financial Secretary will reflect on what I have said about the mismatch between the treatment of the corporate sector and individuals with respect to accumulated losses on life policies and consider whether the matter merits further examination. Perhaps she would write to me with her view in due course.

Ruth Kelly: I certainly will endeavour to consider that point. I can assure the Committee, however, that we have not received a single representation suggesting that the measure could operate unfairly. It is unlikely that it would disadvantage anyone not using a life insurance policy for avoidance. In the normal course of events, life policies are owned by the same individual throughout the life of the policy, and any gains in the policy go to that individual. If that is so, his or her entitlement to deficiency relief will be unaffected by the measure. I think that the hon. Gentleman is suggesting that it is somehow desirable that Government money, running into several hundreds of millions of pounds, should be used to a different end. If he is not, I am sure that he will support the clause.
 Question put and agreed to. 
 Clause 130, as amended, ordered to stand part of the Bill.

Clause 131 - Relief for research and development: software and consumable items

Question proposed, That the clause stand part of the Bill.

Andrew Tyrie: This is a big measure, and a change to a very big measure indeed, introduced four years ago. It follows consultation that was promised when the legislation was first introduced. The total value of the relief that was originally introduced is £600 million. The total value of the relief that we are discussing today is £35 million. The Financial Secretary will correct me if I have got those numbers wrong. The clause extends the relief to include computer software and so-called consumables such as water, fuel and power, and it simplifies the definition of materials, which has been a bugbear for a good number of people trying to claim R and D tax credits.
 We are talking about large sums of money, and I shall return to that general point in a minute. First, I want to ask a few specific questions, some of which have been put in the public domain in various representations. One comes from Intellect, the computing services association. It is worried that tax inspectors are applying their interpretation of claims against definitions inconsistently, and it has written to express that concern. I would be grateful if the Economic Secretary would take a look at that. He may have discussed it with it or with the Inland Revenue. I do not need an answer now, but it is something that he ought to consider. 
 Secondly, will the Economic Secretary explain why sole traders and unincorporated businesses are still to be excluded from that area? It is often where most of 
 the innovation is to be found. Thirdly, does he have any evidence—I am sure that there must be some—to suggest that the relief is becoming part of the avoidance industry. It is complicated. Anecdotal evidence from the accounting firms is substantial—they are taking on staff and moving them into the area specifically to use R and D as a means of tax avoidance. Will it be long before a substantial cluster of people try to get hold of that relief? 
 I have many much more general points, which relate to the overall effectiveness of the scheme and whether the £35 million, or for that matter the £600 million, is being well spent. A recent survey of middle-market companies—carried out by KPMG, in conjunction with the Economist Intelligence Unit—reported that only 5 per cent. of executives felt that the R and D scheme had encouraged them to spend more on R and D. A quarter of executives had not even heard of the scheme and 80 per cent. said that it had no impact on their business. Is the extra £35 million—or whatever the final figure turns out to be—provided by the clause throwing good money after bad? I do not know whether the money will be, or is being, well used. I do not think that the Government know either, and I will return to that point. 
 In a nutshell, the Government have introduced and extended the relief, because they believe that the social rate of return is greater than the private rate of return—what firms earn. The Government say—and have said repeatedly in statements, including the Chancellor's Budget statement—that the good take-up of £600 million means that we are closing the gap between the social and the private return. However, the increase in the relief tells us nothing about whether the money is being well spent and whether the £35 million will be well spent. 
 The conclusion of a thorough short survey of the area—produced by the Institute for Fiscal Studies—came to a worrying conclusion. It said: 
''Unfortunately, many unanswered questions remain about the extent to which and how we can subsidise R and D. This means that the Government should tread carefully in trying to design and implement any particular policy. While there is a strong rationale for subsidising R and D, there are many potential pitfalls and we could end up causing more problems than we solve.''
 I agree that there is a rationale for the sort of subsidy seen in the clause, and I acknowledge that there are potential benefits in several sectors, particularly pharmaceuticals. However, I am not sure whether that rationale is as strong as some of the theoretical research suggests. 
 My main point is that the pitfalls to obtaining those benefits are large. I illustrate that by posing some questions to the Economic Secretary. First, there is the issue of deadweight costs, which was discussed when the measure was introduced. For example, how much of the money is going in extra pay? Since it is a handout to companies, they naturally enough increase the pay of their staff once they have got it. How much of the extra £35 million will find its way there? 
 In order to work that out, perhaps we should consider the £600 million, as that would give us some guidance. Judging by what has already happened to the relief, how much will go in deadweight as extra 
 pay? I do not believe that the Government will know the answer, but I can tell the Committee that best research suggests that around half goes in pay—in other words, it has a limited effect.

Rob Marris: The hon. Gentleman talks about the deadweight of pay, but surely increased pay rates sometimes encourage people to stay in the United Kingdom or with a particular company and not go off to where they could earn more by managing a restaurant or similar, and society as a whole benefits. Pay increases are not all deadweight and are often desirable per se.

Andrew Tyrie: As it happens, before I came to the Committee I scribbled on a piece of paper three possible reasons for the money going to pay not being completely disastrous. They were: it may encourage more people to go into such jobs, which the hon. Gentleman did not mention; it might make them work harder, although I am slightly more sceptical about that; and it might keep them in the United Kingdom, which is certainly possible, and he mentioned that. I think that he would also agree that if those are the objectives, they could all be accomplished much more cheaply and efficiently through a direct spending scheme or subsidy. All the theoretical and practical evidence suggests that a light rather than a blunderbuss tax break is preferable. The R and D tax relief is an inefficient way of achieving all the objectives on pay to which I alluded.

Rob Marris: When the hon. Gentleman refers to an alternative model—you will direct me if I stray too far on this, Mr. McWilliam—is he suggesting a more direct state-sponsored model rather than one that comes through tax relief primarily to private companies? If he is, that surprises me, given the Benches on which he sits.
Mr. Tyrie rose—

John McWilliam: Order. We are going a wee bit wide of the clause. I have gone with it until now, but that was just a shade over.

Andrew Tyrie: Why do not I have a go at answering the question, and if you do not like it, Mr. McWilliam, you can shut me up.
 One way of implementing the clause would be to create a spending line to have the same effect and to vote some money in a departmental budget and give a group of people the power to allocate it, as opposed to doing that through a tax subsidy. I am not going to try here to suggest an alternative model. I would be ruled out of order, and that is not a legitimate subject for discussion today. I want to make a general point that, inasmuch as those are the objectives, the clause and what it builds on are not the best way to go about attaining them. 
 My first question was about deadweight costs. Many other aspects of such costs might be triggered by the clause and the four-year-old legislation that it builds on, but I shall let that pass. I hope that I have made the point by illustration. 
 My second question concerns the administrative cost of running the scheme, to which we are adding with the clause. Do the Government know what the 
 full administrative cost and the full compliance burden of running the relief will be for both firms and the Government? The terms of the relief are extremely complex, which has been a bugbear and a moan of the industry. Although it will be billed as simplification when the Minister responds, on balance we will find that the clause introduces simplification on one hand and complication on the other. It also plays into the hands of big firms that can obtain the best advice on how to collect the R and D relief, and that worries me very much indeed. That is almost always the way with tax reliefs—they go to those who can obtain good advice, which is reflected in the KPMG survey to which I have just alluded. 
 Thirdly, there is the tax avoidance industry issue. A little while ago, I asked the Minister how much that had grown and whether he had any estimates. I doubt whether he has, but I shall be interested to hear anything that he has to say about that. There is quite a lot of anecdotal evidence to suggest that it is already quite a lively industry. 
 The fourth issue is the general pitfall of thinking that we need to engage in a tax competition with other countries. The argument goes like this: other countries may have a clause like clause 131, and they may already be giving subsidies for computer software, so we had better do the same. It is true that the UK is, in general, following a path that other G7 countries have already gone down in terms of increasing the scope for tax reliefs on R and D. In a debate in 2000, my hon. Friend the Member for Arundel and South Downs referred to Canada and the extremely generous scheme that is available there. Incidentally, I think that that scheme includes a relief on, among other things, computer software.

Rob Marris: And Canada is booming.

Andrew Tyrie: I realise that mentioning Canada in the same Room as the hon. Gentleman is extremely dangerous. I will move on very quickly.
 Getting involved in an auction of R and D subsidies with other countries is a crazy idea. Just because some other countries already have subsidies, that should not be an argument for the implementation of the clause. 
 It is worth noting in passing that a good number of UK firms do much of their research abroad. Indeed, the UK virtually heads the global overseas research list. We need to think carefully about why that is so. 
 A fifth reason for being concerned about a further extension of the relief is that it will only add to an existing problem, which is that whenever relief is introduced on this scale, there will inevitably be a heavy distortion at the margin of what constitutes R and D. Indeed, in 2000, the Committee dealing with the Finance Bill dwelt heavily on the definition of R and D, and we will have exactly the same problems with the definition of R and D for software. When is software new? Is it new after six months? The tax advice industry will be having that debate.

John McWilliam: Order. I had better declare an interest: not only did I engage in software R and D some 30 years ago, I have a couple of patents in it,
 none of which is applicable today because they are written in languages that very few people understand these days.

Andrew Tyrie: That is very good of you, Mr. McWilliam. Perhaps you will be able to get some financial advice from the Economic Secretary. I have no interest to declare. I am doing my best to offer my views, without any axe to grind except trying to increase overall economic performance in the country.
 I have a sixth concern. Given that we are going to spend £35 million on the clause, what will be the overall yield? What will be our long-term benefit as a country from spending this money in the R and D field? Of course, the Government will not be able to answer that question because, by definition, R and D takes many years to show a benefit in most cases. Even when it does show a benefit, it is difficult to spot, because of spillover effects, as the economists call them, and therefore we have the constant problem of trying to create a shadow rate of return in order to justify any subsidies. That is a dangerous game to get involved in. I am not against the idea in principle, as a theoretical rationale, but it is dangerous and we must think where it leads. I worry that we may just be throwing some more money at another area of the R and D industry in this country, without any clarity about what we will get back. 
 Although I do not necessarily think that there is any connection between these facts, in the 1960s and 1970s Britain was a leading R and D performer—we were jolly nearly top of the league in spending money on R and D—but our economic performance was lousy. In the past 20 years we have slipped down the R and D league, but our economic performance is very near the top of the EU and much better in global terms. 
Rob Marris rose—

John McWilliam: Order. I can see some anxious faces wanting to come in and make general points about the economy, but such points do not arise from this clause.

Andrew Tyrie: I am grateful for that protection from putative interventions. Incidentally, although I shall not labour the point, Japan is a mirror of the position that I have described for the UK. It was bottom of the R and D league and top of the growth league, and now it is top of the R and D league and bottom of the growth league. We are not talking about the odd year, but decade by decade. We need to be careful about thinking there is some inevitable logical connection, and that this £600 million—soon to be £1 billion, I should think, at the rate we are going—is going to have a dramatic impact.

John McWilliam: Order. I have to tell the hon. Gentleman that non-endogenous economic growth theory does not arise from this clause either.

Andrew Tyrie: On the contrary, if I may debate that point with you on a point of order, Mr. McWilliam, I think that that is exactly what this clause is all about. I will conclude with a few remarks about that in just a moment.

Rob Marris: The hon. Gentleman is briefly questioning the 20 years that we have just had versus
 the previous 20. Would he concede that in the 1960s in this country a higher proportion of R and D money was spent on defence research, which is arguably not very productive, and that that changed in the previous 20 years, which might explain the apparent contradiction in his figures?

Andrew Tyrie: That was an interesting intervention, with which I have a lot of sympathy. It would be interesting to know how much of the £600 million is already going on defence. My guess is that it will probably be about a third—I have seen independent research suggesting that it is 37 per cent. We may have had our feet in the treacle, but we have not yet got them out.
 Alongside aerospace, another major area is pharmaceuticals, where there is a stronger case. The lead time in pharmaceuticals is very long, and I have no doubt that the industry will benefit from the clause, among other parts of this relief. Even there, of course, it is worth bearing in mind the fact that the lion's share of R and D comes through the charitable sector, through Wellcome or, again, through direct spending subsidies through the NHS and off the NHS budget, rather than indirectly through the tax system. Again, we have to ask ourselves who is better at allocating this, and who is better at deciding whether software and consumable items are best handled through a tax system, or whether we should find some other way, if we want to at all, of giving a special subsidy. 
 What do I conclude from all this? Apart from the fact that the very reason that we have this relief is that the Chancellor, although he never talks about it any more, believes in neo-classical endogenous growth theory—or perhaps I should say, if it is not Brown, it is Balls. Certainly, Ed Balls wrote about this subject extensively in the mid-1990s. He did many excellent things, such as the Bank of England's independence, which I shall not mention any more because I can see that the Chairman is leaning forward. If—

John McWilliam: Order. I am just pointing out to the hon. Gentleman that I was talking not about neo-classical endogenous growth theory but about non-endogenous economic growth theory.

Andrew Tyrie: I think you need to have a conversation with Ed about that, Mr. McWilliam. Ed will be absolutely clear in his mind that he thinks endogenous growth theory is the key driver for this £600 million worth of relief.
 Before we go any further down the road of spending money on such clauses, we need a serious, full and independent study of whether it is being well spent. The Inland Revenue is, for the first time, committed to producing core statistical information about the relief, which will presumably include the clause. That is important but, far more important, we need to take that and say, ''Now we're going to spend £0.66 billion or £1 billion.'' There will no doubt be further clauses to extend the provision, because people will be like bees around a honeypot, trying to increase the relief. We must decide whether the relief will be properly used. 
 The questions we need to ask are basic, but not necessarily easy to answer. Who is getting the money? 
 What is happening to it? Is it going in pay? Is it going towards the creation of genuinely new products? Is a large proportion of the money being absorbed in administration? What is the long-run return on such money and what alternatives are there to further extensions of the tax credit? 
 A while back, the Treasury Committee asked for just such a study in one of its reports. I would be grateful if the Minister committed himself to setting up such a study.

David Laws: I am encouraged by that speech and am stimulated to make a short speech in a similar vein. The hon. Gentleman pointed out that the Government are inviting us to approve additional expenditure of public funds on the R and D tax credit, and the extension of its reach. He said that those additional funds might total £35 million. The Red Book appears to indicate that the figure will total some £65 million over three years.
 The hon. Gentleman raised exactly the right issue by asking whether the proposals amounted to throwing money at a problem without providing clarity about what the Government were seeking to get back. I shall not rewind to our earlier debate about the film industry tax relief, but the clause seems to deal with a similar example of the Government seeking to subsidise an activity—R and D expenditure. However, they are not always clear about the economic return through enhanced revenues to the industries concerned, or to the taxpayer. 
 In justifying the Government's film industry tax relief, the Paymaster General said that she was relying on a report prepared by the Select Committee on Culture, Media and Sport. I imagine that, if that Committee had condemned the Government's measure and said that the economics did not stack up, the Treasury would have relied on its own figures. It is odd that, when we table parliamentary questions on the cost-benefit analysis of such subsidies, it turns out that the Treasury has undertaken no such analysis, and has not assessed the economic benefits, or how much tax will come back through enhanced activity. That is surprising in light of the fact that the Treasury is the one Department that we would look to for rigour on and concern about the expenditure of public funds. 
 We cannot, therefore, escape the suspicion that the Chancellor, or some other member of the Government may have decided that it would be fantastic to be seen to be subsidising an activity such as R and D or the film industry, and to be urging officials and other Ministers to bring forward proposals in that area, without being aware of the costs and benefits. 
 The hon. Member for Chichester referred to a recommendation that the Treasury Committee made. That Committee should not judge whether the R and D tax credit is value for money. Rather, the Treasury should do so. It should produce estimates of the boost to R and D expenditure as a consequence of such tax reliefs and demonstrate how the enhanced revenues resulting from economic growth would benefit the taxpayer. 
 The hon. Gentleman mentioned that expenditure on the R and D tax credits is something of the order of £600 million and is growing considerably. I would have thought that, before we approved an additional £65 million of expenditure on them, we would want a Treasury assessment of how effective the relief has been to date, what the returns from it will be, and what the effect on taxpayer revenues will be through enhanced yields as a consequence of additional growth. 
 We would certainly want some estimate of how much additional R and D spend the Economic Secretary anticipates there will be as a consequence of clause 131. How much extra R and D expenditure are the Government anticipating we will get for the expenditure of £65 million of taxpayers' money? If we do not know those figures, how can we judge whether the tax relief has been a success and whether it offers value for money? 
 When we had the debate about film industry tax relief, the evidence that the Treasury cited came not only from a departmental Select Committee, whose degree of rigour on economic questions cannot be expected to be as great as that of the Treasury, but from industry bodies, which are not objective or independent in such matters. It also cited anecdotal evidence that there was additional expenditure as a consequence of those subsidies. However, the question is not whether there is some additional expenditure. After all, if we are spending £1 billion on film industry tax relief or close to £1 billion on R and D tax credits, we would expect there to be some economic consequence. The question is how much economic consequence flows from that. How much impact is there? 
 I hoped that we would be looking at the possibility not of amending or extending the R and D tax credit, but of abolishing it. If we were talking not about abolishing it but about extending it, I hoped that the Economic Secretary could have come forward with a serious study showing how the R and D tax credit has worked to date in economic terms. He should certainly be giving us today an indication of how much more R and D expenditure will result from the additional £65 million of taxpayers' money that will go into this Government policy.

John Healey: I was interested in the general critique of the R and D tax system offered by the hon. Member for Chichester. He described it at one point as rather inefficient, and many of his comments were echoed by the hon. Member for Yeovil. I am not sure whether that means that either of their parties would axe that tax credit, if they were ever in a position to make such a decision.
Mr. Laws indicated assent.

John Healey: The hon. Gentleman is nodding. I am sure that that will be of interest to business organisations that have urged us to introduce and to develop that tax credit.
 In contrast to those general comments, clause 131 is relatively narrow in scope. Last year, we said that we would introduce a change to include the expenditure 
 on software used in R and D as a cost that qualifies for R and D tax credit. We also invited views on whether the definition of materials used in R and D could be improved. Clause 131 implements those changes, and includes a further change to widen the range of qualifying costs, so that expenditure on power, water and fuel is included, as the hon. Member for Chichester pointed out. 
 Both hon. Members cast doubts on the nature and purpose of the tax credits. We believe that we need those tax credits. It is a belief that is shared by business organisations and many of the businesses that are now benefiting from them. We need them to encourage new products, services and technologies. The economy needs such innovation to grow in the long term. 
 It is vital that companies invest in R and D, and to be able to do so it is vital that finance is available to support what are sometimes long-term and risky investments. The UK has trailed competitor countries in investment for some time. Giving an incentive to invest in R and D is one way to help to reverse that trend. More investment in R and D should lead to greater innovation and, ultimately, to higher productivity. 
 The credits work by giving companies extra tax relief for their spending on R and D. Before the credits, companies could set 100 per cent. of their R and D spending against profits. For small and medium-sized companies, the credits raise that to 150 per cent., and for a larger company to 125 per cent. 
 Since the inception of our schemes in 2000, more than 9,000 claims from SMEs have been received, providing support to innovative companies of around £530 million. As the hon. Member for Chichester said, this is a big measure. It is also, although he did not concede this, welcomed by businesses and has been of benefit to them. I am not sure whether those 9,000-plus companies would agree with him that it is not making a difference.

Andrew Tyrie: Can the Minister name a tax relief that has not been welcomed by the recipients?

Rob Marris: Widow's relief.

John Healey: I thank my hon. Friend for his intervention. I am not sure what the position of widow's relief is in Canada, but I do not want to encourage the hon. Member for Chichester, as we should be discussing clause 131.

John McWilliam: Unless the lady was widowed as a result of research and development expenditure, it is out of order to talk about that in this clause stand part debate.

John Healey: We have had no reports at the Inland Revenue of large-scale avoidance as part of this relief. I am also happy to say that we have had no reports of deaths as a direct result of the tax credit.
 I turn to the serious issue of evaluation. At present, with tax credits relatively recently introduced and still bedding down, and because they are designed to stimulate long-term investment with long-term impact, 
 it is too soon to say precisely what effect they are having. The Inland Revenue is starting a full evaluation, which, as hon. Members would expect, will include an analysis of value for money. It will cover precisely the issues that the hon. Members for Yeovil and for Chichester have raised. It will provide information and analysis on the effects of the policy over a number of years. 
 All the academic evidence suggests that tax credits are a measure for the longer term. The impact of R and D on the prospects and productivity of individual companies, and on the economy more generally, will become clearer only in the longer term. Without doubt, the Government are making an investment in the long-term prospects, the long-term growth and the long-term stability and prosperity of the British economy.

David Laws: I am pleased to hear that a study is being conducted by the Treasury. Can the Minister tell us when that will be published?

John Healey: I do not think that the hon. Gentleman listened carefully enough. The evaluation is being undertaken by the Inland Revenue, which is appropriate as it is responsible for this area of taxation. The work is starting now, and at the moment I do not know when the results will be published. As soon as Ministers can confirm such detail, no doubt we will.
 The hon. Member for Chichester referred to the Institute for Fiscal Studies. It has raised some important questions, which he and the hon. Member for Yeovil have echoed. We will bear them in mind as we carefully design and carry out the evaluation. However, I remind the hon. Gentlemen that the IFS also argued for a system of tax benefits to boost investment. 
 I turn to one or two other specific points that I took from the hon. Member for Chichester. He cited intellect and claimed that there had been an inconsistent application of the definition for the purposes of the relief. He has heard that message from professionals and some representative bodies; we heard the same message. He may remember that, during the 2004 Budget, we announced that the Inland Revenue would be looking hard at the practical delivery of tax credits. I can confirm that, as part of that, the Revenue will be considering, both internally and by holding discussions with outside interests, whether the schemes can be improved. That will include careful consideration and examination of whether there are grounds for the claims that he has heard. 
 The hon. Gentleman asked why unincorporated bodies and sole traders should be excluded from the R and D tax credit. The short answer is that all the evidence, including our discussions with business, suggests that almost all the R and D over £10,000 is conducted by limited companies. Where a company sub-contracts R and D to an individual, which is perhaps the most likely scenario that he is considering, it can claim the R and D tax credit. He might accept that, in the long term, that may mean a benefit to the 
 individual, as the company may be able to conduct more R and D than individual concerns.

Andrew Tyrie: A moment ago, the Minister prayed in aid the IFS report, the concluding section of which I have in front of me. It says:
''Tax incentives seem a natural policy tool for a market-oriented government wanting to increased R and D expenditures.''
 It goes on to say: 
''Economists, however, been traditionally been sceptical over the efficacy of fiscal provisions.''
 The last line of the report concludes: 
''While there is a strong rationale for subsidising R and D''—
 we agree that that is a reference to the theoretical rationale, which nobody is disputing— 
''there are many potential pitfalls and we could end up causing more problems than we solve.''

John Healey: I think that the hon. Gentleman simply amplifies the point that he made earlier, which I dealt with.
 The hon. Gentleman also said that R and D tax credits are becoming a part of the avoidance industry. The Revenue does not yet have evidence of any large-scale avoidance emerging in the R and D tax credit regime. I say to him, quite directly, that if, as he was suggesting, accounting firms know of tax avoidance of that nature, I hope that they will help us to stamp it out, rather than taking on extra staff and turning it into a business activity for their own ends. 
 Finally, the hon. Gentleman said that the definitions are complicated, and suggested that they may somehow play into the hands of big companies. The Committee will recognise, and I accept, that the definition of research and development is not straightforward. It simply reflects in legislation the fact that the definition and practice of R and D are constantly changing and quite difficult to pin down. It is an area of innovation, new activity and new techniques, and it is never going to be straightforward to reflect such activity in tax legislation. Nevertheless, I was not sure that I heard him do so, but I hope that he will welcome our attempt to improve the definition. 
 The feedback that we have received from business and the industry has been very welcoming. For example, Deloitte said: 
''The new guidelines are generally acknowledged as a significant improvement on the original'',
 and PricewaterhouseCoopers said that the new definition that we proposed in the Budget is ''clearer and simpler''. In passing, I make it clear to the Committee that it also welcomed the extension of tax credits to apply not just to software but to power, fuel and water. 
 The changes in the clause will widen the range of costs that qualify for the relief, representing, as the hon. Gentleman said, a further Government investment in R and D of £35 million per year. We have listened, in addition, to calls to simplify the definition of materials used in R and D, which this clause implements, in the terms recommended by many companies and professionals. To be clear, the same changes are being made to all the R and D tax 
 credit schemes: first, the small and medium-sized company scheme; secondly, the large company scheme; and thirdly, the vaccines research scheme. 
 I do not know what the hon. Gentleman will choose to do, but I hope to see very strong support on the Labour Benches for an innovation that the Government introduced in 2002 and for clause 131. 
 Question put and agreed to. 
 Clause 131 ordered to stand part of the Bill.

Clause 132 - Temporary increase in amount of first-year allowances for small enterprises

Howard Flight: I beg to move amendment No. 104, in
clause 132, page 123, line 3, after 'small', insert 'or medium-sized'.

John McWilliam: With this it will be convenient to discuss the following amendments:
 No. 99, in 
clause 132, page 123, line 5, after 'small', insert 'or medium-sized.'.
 No. 100, in 
clause 132, page 123, line 7, after 'small', insert 'or medium-sized.'.
 No. 101, in 
clause 132, page 123, line 12, after 'small,' insert 'or medium-sized.'.
 I remind the Committee that this is a very narrow group of amendments, which deals only with changing ''small'' to ''small or medium-sized''. The meat of the clause is in the clause itself.

Howard Flight: I have much sympathy with the comments made by my hon. Friend the Member for Chichester (Mr. Tyrie) and the hon. Member for Yeovil (Mr. Laws), which have some relevance to this clause and these amendments.
 The four amendments are all concerned with the proposed widening of the increase in first-year allowances, which will go up from 40 per cent. to 50 per cent., to include medium-sized as well as small businesses. As I understand it, the definitional territory is that a small business has a turnover of up to £5.6 million, a balance sheet of up to £2.8 million and up to 50 employees, and a medium-sized business has a turnover of up to £22.8 million, a balance sheet of up to £11.4 million and up to 250 employees. 
 The amendments reflect one of the suggestions in the CBI response to the clause. There are others, which I will come to later, in the stand part debate. It is fair to say that, in a sense, medium-sized businesses have become the poor relation. There are a great many tax and other incentives in the venture capital area. Large businesses have better access to markets. If anything, while a business is medium-sized, wherever the lines are drawn, it really does not have many advantages. 
 It is questionable whether such measures really work—as the previous comments made clear—but if they are to be introduced there does not seem to be much logic in restricting them to small companies, when if anything the medium-sized sector needs more assistance.

John Healey: I was interested to note that the hon. Gentleman started by saying that he had a great deal of sympathy with the comments made on the previous clause. Those comments argued that we should not be extending the R and D tax relief scheme.

Howard Flight: I was duly obeying our Chairman's instructions. The other comments will come later. The amendments are to the clause as it will stand if we are to have such incentives.

John Healey: I am in no doubt about the effect of the amendments. My point was simply that the hon. Gentleman expressed sympathy with the argument that was made about the previous clause, in which it was claimed that we should not be committing extra Government expenditure to the R and D tax relief scheme, when his amendments would do just that—to the tune of £180 million a year. The hon. Member for Chichester anticipated what he described as bees round the honeypot of claims for extending the relief in the future. Amendment No. 104 is clearly looking to the honeypot.
 The purpose of the amendments is to extend to medium-sized businesses the increase in first-year capital allowances that we are introducing for small businesses. We are talking about something that is of a similar nature to what we have just discussed under clause 131. I want to ensure that the Committee is clear about the treatment of medium-sized companies, which is the concern behind the amendments. Earlier this year, we increased the thresholds for small and medium-sized businesses to the maximum allowed under European Union regulations. It is anticipated that that will cost the Exchequer £100 million this year, £170 million next year and £125 million in 2006–07. From January 2004, a business with a turnover of up to £5.6 million may be classified as small. In fact, about 99 per cent. of UK businesses are classified as small and so will be able to benefit from the increased allowances in the Bill. 
 Medium-sized businesses, which include businesses with a turnover of up to £22.8 million, will continue to benefit from the generous 40 per cent. first-year allowances for small and medium-sized enterprises that we made permanent in 2000. Increasing the rate of the first-year allowances for medium-sized enterprises from 40 per cent. to 50 per cent. would carry the high Exchequer cost that I mentioned, of £180 million for one year. That additional cost could not be justified. I am surprised that the hon. Gentleman is in favour of that. He has made it clear that it is the result of a representation made to him by the CBI.

Rob Marris: Is my hon. Friend aware that the Institute of Directors, which has made submissions to me—and, I suspect, to other Committee members—has not suggested an extension of the allowance to medium-sized companies. The IOD has historically had a greater tendency to represent small and medium-sized enterprises than the CBI, which has a greater tendency to represent the big boys, although it does not do that exclusively, so it seems that the big boys want the extension and the little boys do not.

John Healey: My hon. Friend makes an interesting point. I suspect that it will help him make up his
 mind—as I hope it will all my hon. Friends—that the Committee should reject the amendments if they are pressed to a vote.

Howard Flight: I have not heard any rationale for why the allowance should be increased from 40 per cent. to 50 per cent. for small companies and not for larger ones, other than money. I take issue with the figure. I want to hear the Government's logic in doing this for small companies but not for medium-sized enterprises, which if anything are the poor relations.

John Healey: The hon. Gentleman suggested that, if you were to allow a stand part debate, Mr. McWilliam, he would make some general points. I therefore thought it appropriate to consider such general questions if you do allow a short stand part debate.

Howard Flight: I look forward to hearing the Economic Secretary's response on stand part. I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn. 
 Question proposed, That the clause stand part of the Bill.

Howard Flight: I will use the stand part debate to mention the two other issues raised by the CBI. The first concerns whether the Government are considering extending the benefit to businesses that do not buy plant but lease it. A later new clause—new clause 4—deals with that issue. Secondly, the CBI raised the issue of whether relief might be given for making physical alterations to premises to meet the requirements of the Disability Discrimination Act 1995, where I understand that the capital investment that is required to be in place by 1 October 2004 does not count as capital investment for first-year allowances.
 More widely, and echoing the previous points, my concern is that the reason for the Government giving what it is giving to small businesses is, in fact, a sop or fig leaf to hide the removal of the 100 per cent. allowance on information and communications technology equipment and the introduction of the 19 per cent. non-corporate distribution rate tax. There seems little logic in a period of just two years. Small businesses do not have armies of accountants and finance directors to know about all these things. It does not seem logical to turn the tap on and turn the tap off. If anything, the economy is already at full capacity this year, so I look forward to hearing the Minister's justification for the measures.

John Healey: This clause increases the rate of first-year capital allowances for small businesses from 40 to 50 per cent. for one year from April 2004. In our view, the increased allowances will assist small businesses' cash flow, and will provide enhanced funding for new investment. They are, of course, a vital part of the UK's economy, currently investing over £3 billion in plant and machinery. The increase in the first-year allowances at this time is designed further to support small businesses, encouraging them to innovate, invest and grow in the long term, ensuring that the UK economy more generally remains one of the fastest-growing in Europe.
 The hon. Gentleman asked why now. If we accept the proposition that it is essential that our small businesses invest for the future, the upturn in the economy means now is the right time to provide the additional support to new, and in particular small, growing businesses. That is the reason for this targeted temporary increase. 
 On the CBI's representations over leased plant, the hon. Gentleman knows well that at present we have a radical review of the reform of corporation tax, and we have already announced that we will consider further whether the taxation of leased plant and machinery can be modernised. It makes sense to consider the CBI's representations and the points that he makes in the wider context, rather than in the narrower context of this clause. 
 On that basis, I commend the clause to the Committee.

Rob Marris: On a point of order, Mr. McWilliam. I would like some clarity from you, perhaps via a Minister, as to whether Members should be declaring interests on this in terms of capital allowances to Members' expenses, and so on.

John McWilliam: Anybody who has an interest should declare it.

Howard Flight: I certainly did not imagine that there was something other that Members of Parliament could claim here. If it is the case, it is yet another example of the lack of wisdom of such measures.

John McWilliam: I can imagine one: if Members of Parliament wanted to buy an old steam typewriter out of their allowances, it would be covered.

Howard Flight: I just raised the question of incorporation versus non-incorporation, but if an interest is to be declared, let us declare it on behalf of all of us.
 I suggest that the real reasons for this measure are that there is likely to be a general election in the next year, and it is a sop to the 19 per cent. non-corporate distribution rate. As I pointed out, there is no economic logic for benefiting small rather than medium. This is an example of a less than properly thought through economic justification for legislation. 
 Question put and agreed to. 
 Clause 132 ordered to stand part of the Bill. 
 Clause 133 ordered to stand part of the Bill.

Clause 134 - Lloyd's names:

Question proposed, That the clause stand part of the Bill.

Howard Flight: I rise just to acknowledge that I understand there has been very useful co-operation between the Inland Revenue and Lloyd's to sort out these arrangements, which arise from individual Lloyd's members converting to underwriting through limited liability vehicles, and we support the measures.
 Question put and agreed to. 
 Clause 134 ordered to stand part of the Bill. 
 Schedule 25 agreed to.

Clause 135 - Offshore funds

Howard Flight: I beg to move amendment No. 192, in
clause 135, page 126, line 7, leave out 
 'the day on which this Act is passed' 
 and insert '17th March 2004'. 
 [R] Relevant registered interest declared.

John McWilliam: With this it will be convenient to discuss the following amendments:
 No. 193, in 
schedule 26, page 408, line 29, leave out from beginning to 'this' in line 30.
 No. 196, in 
schedule 26, page 408, line 29, leave out 
 'the day on which this Act is passed' 
 and insert '31st December 2005'.
 No. 194, in 
schedule 26, page 409, line 20, leave out from beginning to 'this' in line 21.
 No. 197, in 
schedule 26, page 409, line 20, leave out 
 'the day on which this Act is passed' 
 and insert '31st December 2005'.
 Again, this is quite a narrow group of amendments.

Howard Flight: May I crave indulgence by saying up front that the investment management industry—and I personally declare an interest for the register—was greatly concerned that the measures under this part of the Bill would be damaging for the industry, and especially potentially damaging for hedge funds, and there is great relief that the reverse is the case. The clause contains some important relaxations, and it will enable umbrella funds to include distributing and non-distributing funds, which saves quite a lot of time, administration and costs for individual investors. The measures are essentially welcome.
 There are two starred amendments in the group, but to a large extent they are a different way of achieving the aims of two of the other amendments, which deal with accounting date issues and including as large a number as possible of funds within the new arrangements. The start date in the clause is likely to exclude those funds with a 30 June 2004 year end. Amendment No. 192 suggests that the date should be brought forward. An eventuality that appears not to be covered is the position relating to a sub-fund or a share class that ceases prior to the effective date, and the implications of that in relation to whether the sub-fund falls under the new or old rules. 
 Amendments Nos. 193 and 194 are alternative versions, in a sense, of Nos. 196 and 197. They are a response to the fact that the change in calculation of UK equivalent profits from an income tax basis to a corporation tax basis in connection with creditor relationships and derivative contracts, as the clause stands, raises some problems that might be better dealt 
 with within the Bill. Following a pragmatic approach, the amendments would do away with the complication and uncertainty in calculating UK equivalent profits for bonds and derivatives as the accounting measure will tend to be followed. However, an important assumption is that the accounts of the funds are compliant with the authorised unit trust statement of recommended practice. 
 More guidance is required on what will be accepted by the Inland Revenue in relation to what the offshore fund managers need to do to prove the fund accounts are SORP-compliant. There have been some discussions with the Revenue on the amendments, and I repeat that there are two versions: amendments No. 193 and 194 and amendments Nos. 196 and 197. We seek to standardise accounting arrangements in the future.

Ruth Kelly: I will ask the Committee to reject the amendment. Before I address the specific points raised, it may help if I explain the purpose of the changes that we are proposing. Their aim is to provide more flexibility for fund managers to tailor their products to the marketplace and to enable more UK investors to use the tax rules that they would have used if they had invested in an equivalent UK fund.
 The changes focus on the rules for an offshore fund to obtain distributor status. That in turn determines the tax treatment of the UK investor. There are three main changes. First, offshore funds will be able to use the same corporation tax rules as a UK unit trust in measuring their distributions against their profits instead of income tax rules. Secondly, some of the investment restrictions are abolished. Thirdly, separate sub-funds and classes of interest can qualify for distributor status individually in their own right without affecting or being affected by other parts of the fund. 
 The Bill provides a regulatory power to deal with some mainly administrative issues arising from applying the rules to sub-funds and classes of interest. Consultation with industry representatives is in train to identify what regulations will be needed, but at this stage I can assure the Committee that I have seen nothing to suggest that the regulations will cover anything other than minor points of detail and/or transitional issues that would overburden the primary legislation with changes with a short lifespan. 
 The changes follow a productive period of consultation with the funds industry. I am confident that they will be welcomed by fund managers and investors alike. Indeed, I note the support of the hon. Member for Arundel and South Downs for the overall thrust of the changes. 
 Amendment No. 192 seeks to bring forward the commencement date so that the changes apply to account periods ending on or after Budget day—17 March 2004—instead of on or after the date of Royal Assent. However, I draw to the Committee's attention the fact that the changes have already been announced. They have been welcomed by fund managers, who have already started planning in 
 response to them. They will have taken decisions based on the expected start date. If we change that to 17 March, some fund managers may have to unpick commitments that they have given, and that may not even be possible. 
 Moreover, if the new rules were to apply to account periods ending on or after 17 March 2004, they would affect the last but one tax year. It would be wrong to expect some investors to check back to that year to determine whether they were affected. If the start date is left as it is, it will affect only the tax year that has just ended. 
 The hon. Gentleman asked about a sub-fund or share class that ceases before the effective date. The new rules allow the sub-fund or class of interest to take the same account period as its umbrella fund in order to qualify under the new rules, provided that the umbrella fund account date falls after the commencement date. I imagine that that deals with the hon. Gentleman's concern. 
 The remaining amendments appear to address the same point, so I shall take them together. The changes respond to a long-held concern of the industry: namely, that to test for distributor status, accounts had to be recast on an income tax basis for interest income and income from derivative contracts such as futures and options. The industry pressed us to allow it to move to the full corporation tax basis, and we have changed the rules in response to its concerns. We also took note of its concerns that existing funds might need time to change their systems and deal with any transitional problems before moving fully to the new basis. The new rules allow for that to happen. 
 The amendments would allow wholly new funds to use the old income tax-based method to test their distributor status. That would run counter to the aim of the changes and counter to what the industry clearly wants. Both the industry and the Government wish to phase out the old rules, but we will not achieve that if yet more funds start up under them. 
 I note that amendments Nos. 193 and 194, which would allow new funds indefinitely to use the old rules, have been tempered by the later proposals to allow that only for new funds established on or after 31 December 2005. However, that would still allow new funds to work on the old basis long into the future; for example, a new fund established in December 2005 would draw up its first accounts in December 2006. Fund managers argued that the corporation tax basis was the way forward and, having agreed to that, we wish to press ahead without undue delay. 
 The hon. Gentleman asked about SORP. The Revenue is discussing with the industry how to take that forward in guidance. I will respond to him if he writes to me with particular concerns. 
 In summary, we have gone a long way towards achieving the reforms for which the industry has been looking. The changes will boost funds' ability to compete in the market. This is a changing environment. I welcome the positive dialogue with the industry that led to the changes, and I assure the 
 Committee that that dialogue will continue. I urge the hon. Gentleman to withdraw his amendments.

Howard Flight: Amendment No. 192 is intended simply to allow more funds to take advantage of the new flexibility earlier. It is a minor, constructive point, and I take the point that the main concern has been addressed.
 The two other sets of amendments are supported by the industry and the Institute of Management Accountants, which I understand are in continuing discussions with the Inland Revenue. The issue is that the Bill prescribes one regime for accounting standards for funds established before Royal Assent, and another for funds established afterwards. Funds subject to other jurisdictions' accounting requirements have to perform additional computations of UK equivalent profits, and that has given rise to a lot of operational hassle. The Bill proposes that funds established on or before Royal Assent can elect to compute UKEPs arising from creditor relationships and/or derivative contracts by reference to chapter 2 of part 4 of the Finance Act 1996 and schedule 26 of the Finance Act 2002 as if they were an authorised unit trust. However, the same flexibility is not provided for funds established post-Royal Assent. 
 The amendments would provide that flexibility for funds established post-Royal Assent but before international accounting standards were adopted in January 2006, and from January 2006 the Government would use the new regulatory power to update the reference to international accounting standards. In its discussions with the Revenue on that point, the IMA had been seeking to implement a common implementation date, and it hoped that that would have support.

Ruth Kelly: I thought that I had dealt with the hon. Gentleman's amendments during my response to his concerns. The issue of international accounting standards applies to listed companies and consolidated accounts for the accounting period starting on or after 1 January 2005. In the United Kingdom, individual companies may use them from that date too, but other jurisdictions may have other rules or requirements and are unlikely to be driven by when the offshore funds themselves will be required to adopt international accounting standards. We are in continuing discussions with the industry about how the issue will be dealt with, and I am sure that we will be able to respond to the point to the satisfaction of both parties. On that basis, I hope that the hon. Gentleman will seek leave to withdraw the amendment.

Howard Flight: In respect of amendments Nos. 196 and 197, I understood that there was some agreement between the Revenue and the IMA on the arrangements. On the basis of what the Minister has said, I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn. 
 Clause 135 ordered to stand part of the Bill.

Schedule 26 - Offshore funds

Howard Flight: I beg to move amendment No. 195, in
schedule 26, page 414, line 30, at end insert— 
 '(1A) In subsection (3), paragraph (a) replace ''5 per cent'' with ''15 per cent''.'.
 The investment conditions to be met by funds seeking distributor status are essentially being removed, but the 5 per cent. limit on investment in other funds has been retained, which poses problems for funds of funds. The amendment would allow an offshore fund to hold a greater interest in a non-qualifying offshore fund and it would allow greater flexibility in the fund-of-funds market; 15 per cent. is a common threshold used in other investment funds. It may be arguable that 15 per cent. is too great, but the 5 per cent. limit still causes significant problems to the development of funds of funds.

Ruth Kelly: The amendment would triple the amount that an offshore fund can invest in other offshore funds without losing its status as a distributing fund. As I explained earlier, the clause and the schedule introduce changes to the offshore fund regime. They are the result of consultation with the industry and have generally been welcomed as providing more flexibility for fund managers to tailor their products to the marketplace. They also enable more UK investors to have the same tax rules as if they had invested in an equivalent UK fund. The changes do not alter the investment restriction, which limits to 5 per cent. the amount an offshore fund can invest in other offshore funds without losing its distributor status.
 The purpose of the 5 per cent. rule is to stop funds accumulating income in lower-level funds and taking only a small distribution from those funds, which they then distribute to their own unit-holders. The level of 5 per cent. is a form of de minimis to allow relatively small investments in other funds to be disregarded. 
 A change to 15 per cent., as proposed by the hon. Gentleman, represents a major shift, and it would give funds wider scope to structure their investments to minimise the amount that they are required to distribute. It could radically alter the competitive balance between offshore and UK funds. Moreover, a level of 15 per cent. can hardly be regarded as de minimis, as it is even higher than the 10 per cent. regulatory limit on investing in other funds imposed by the EU directive for collective investment funds. 
 The new offshore fund rules offer a considerable gain in flexibility to the funds industry, but we must retain the basic integrity of the offshore funds tax system to ensure a level playing field. I therefore urge the hon. Gentleman to withdraw his amendment.

Howard Flight: I am inclined to accept the argument that 15 per cent. is too high. It is not a matter simply of the difference between onshore and offshore funds, because an onshore fund may wish to develop along a founder funds route and the regulatory level is 10 per cent. I hope that the Government will further consider that as a matter of principle, but I accept that the
 industry should be pleased with the measures. On that basis, I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn. 
 Schedule 26 agreed to.

Clause 136 - Meaning of ''offshore installation''

Question proposed, That the clause stand part of the Bill.

Howard Flight: There have not been any major objections to the clarification offered by the clause, but some questions have been raised. The explanatory note states:
''The same types of vessel will continue to be categorised as an offshore installations as now'',
 and it gives the examples of offshore installations, jack-up drilling rigs—

John McWilliam: Order. We are speaking to the schedule again and not the clause. It is the usual problem with schedules; I do not know why we are not allowed to debate schedules with clauses. That would seem eminently sensible to me. Perhaps I should write to the Chairman of the Procedure Committee about that.

Howard Flight: I thank you, Mr. McWilliam; I have nearly finished. The courts have held that those vessels are currently not offshore installations. Confirmation is sought that vessels that the courts have said attract relief will continue to do so. However, as you pointed out, Mr. McWilliam, that is the schedule and not the clause.
 Question put and agreed to. 
 Clause 136 ordered to stand part of the Bill. 
 Schedule 27 agreed to. 
 Clause 137 ordered to stand part of the Bill.

Clause 138 - Corporation tax: health service bodies

Question proposed, That the clause stand part of the Bill.

Andrew Tyrie: You will be pleased to hear, Mr. McWilliam, that I will not delay the Committee for long. I want clarification about what the clause means because the background notes are somewhat confusing. As I understand it, the Treasury is saying that, by order, it can remove a foundation trust exemption for a specified activity or class of activity that appears to be of a commercial nature where the exemption is likely to favour the foundation trust over a commercial body which might want to undertake or is already undertaking the activity. In that case, the foundation trust can choose to form a non-charitable company to conduct such activities and be taxed in the normal way; otherwise, I presume, it is possible for the foundation trust to form charitable companies so that the foundation can benefit from gift aid. In other words, it can get the relief on tax that it would
 otherwise have to pay back to the foundation through gift aid. If that is what the measure is about, I want to raise two issues.
 First, what is the purport, if any, of paragraph 16 of the background notes? It states that 
''there is no requirement for NHS foundation trusts to conduct such activities within a limited company. So''
 in the absence of 
''any requirement to do so, it is entirely possible for such activities to be carried on by and within NHS foundation trusts themselves and any profits would be exempt from tax.''
 That is confusing. 
 Secondly, I presume that there are some general provisions to prevent round-tripping of the gift aid so that, if the money goes back to the foundation trust, it cannot then go back to that commercial entity to which I referred and thereby give the company that has been created by the foundation trust a commercial advantage. 
 Provided that I have clarification of those two points, I am happy with the clause.

Ruth Kelly: The purpose of the clause is straightforward: to put NHS foundation trusts on the same tax footing as NHS trusts. The companies set up by NHS foundation trusts are not charities, so the issues that the hon. Gentleman raises do not apply. They would be run as commercial companies and taxed on the same basis as NHS trusts are currently taxed. This is purely a competitive issue so that NHS foundation trusts do not have an unfair competitive advantage over other companies that are attempting to run the same business. [Interruption.]
 Does the hon. Gentleman want to intervene?

Andrew Tyrie: I am sorry, but I have not made myself clear. We are completely at one on the intention. I just wanted clarification on the blocking of round-tripping, which I am sure is there somewhere, on the gift aid side. Perhaps the explanatory notes could have been better drafted. When the Financial Secretary looks at them later, she will see how much scope for confusion they contain.

Ruth Kelly: It is unclear how the issue with gift aid arises because we are not discussing a charitable situation. However, I will certainly look at the explanatory notes and ensure that the hon. Gentleman is satisfied that the true intention is met through those notes. We agree on the principle and I am sure that he will wish to support the clause.
 Question put and agreed to. 
 Clause 138 ordered to stand part of the Bill. 
 Further consideration adjourned.—[Jim Fitzpatrick.] 
 Bill to be further considered on Tuesday 8 June at half-past Nine o'clock.—[Jim Fitzpatrick.] 
 Adjourned accordingly at twenty-three minutes past Five o'clock till Tuesday 8 June at half-past Nine o'clock.